Nick Goetze discusses fixed income market conditions and offers insight for bond investors.
The past week was one of the more volatile fixed income markets in recent history. That volatility, created by the constantly changing news on Tariffs, was driven predominantly by headline noise, not by credit or safety concerns. That is not meant to detract from the natural unease associated with significant market price movement. Media sources are coming at us from all directions with different speculations about what is happening in the financial markets. However, it is premature at this stage to put too much stock in predictions given the lack of a concrete plan around global trading relationships. The only constant at the moment seems to be rapidly changing narratives driving significant volatility.
Sooner or later, the trade situation will calm down, or the markets will start to become less reactive to the noise. In the meantime, we have to keep the current broader market volatility in mind as our traders work to achieve best execution when buying and selling bonds. At Raymond James, our clients’ fixed income trade execution is a top priority. When market volatility reaches significantly higher levels than the norm, it is important to take extra time reviewing trades to make sure that the execution price level meets the high standard we strive to achieve for our clients. We ask that you keep this in mind if the process for executing your fixed income transactions takes a little more time than you are accustomed to.
Potentially adding to angst, market pricing on existing positions may show greater than normal swings in value. The stock market has six to seven thousand symbols trading constantly. The frequency of trades makes pricing on equities relatively easy. The bond market has millions of individual securities – most of which do not trade on a given day. As a result, independent pricing services are used by the industry to estimate where every bond might trade on a given day. More volatility in the fixed income markets can lead to more extreme valuation estimates by the pricing services. This, too, settles as the market finds its footing.
Thankfully, none of this volatility changes the core function of the bonds. As always, for buy-and-hold investors, barring the unlikely event of default, the constant when owning individual investment grade bonds is the known cash flow, the preservation of wealth and the known timeline when principal is returned at the call date or maturity. Volatility in some of the fixed income markets may cause liquidity to slow down as traders put an extra “eye” on trades; on the other side, it may also create opportunities for those looking to add to their portfolios. In either case, your Raymond James team is here to help you with a transaction or talk about what we are seeing in the markets.
The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.
Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.
To learn more about the risks and rewards of investing in fixed income, access the Financial Industry Regulatory Authority’s website at finra.org/investors/learn-to-invest/types-investments/bonds and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.
