How to leverage the rare opportunity of discounted fixed-income investments to balance your portfolio during this disconcerting time.
Even if you are a seasoned and skilled investor, the current confluence of economic and geopolitical events might be more than a little disconcerting. Current events should also prompt a hard look at your portfolio, including the bond and cash portion. That is, fixed-income investments usually in the form of corporate, treasury, and municipal bonds are now trading at extremely attractive levels.
The good news is that since the bond market is currently down over 15 percent, there is finally an opportunity to buy bonds at discounted prices for the first time in many years. The Federal Reserve has been raising interest rates, so yields on bonds are attractive. You will need to balance risk within your fixed-income portfolio just as you would your stock portfolio.
Our view in building a bond portfolio today is to focus on a short to intermediate-term bond ladder. With a bond ladder, as one bond matures and pays back the principal, you now have cash to invest in other areas of the market to take advantage of current conditions. For example, if a recession pushes stock prices down, when a bond matures you can use that cash to buy equities. If interest rates move higher then you can add another bond to your ladder.
In our fixed income portion of the portfolio there are 3 types of bonds to consider.
High-Quality Corporate and Municipal Bonds (“Munis”)
In the corporate bond space, investors are getting 5 percent to 6 percent yields with short to intermediate-term bonds. With Municipal bonds, the yield is 3 percent to 4 percent, but if you live in the municipality, those yields are tax-free. Within this category, we are building a bond ladder by buying bonds with varying maturity dates between 2023 and 2028. We would recommend making this category the core portion of your fixed income portfolio for stability and cash flow.
Short-Term Treasury Bonds (“Treasuries”)
Short-term treasuries would mature in 3-12 months, and they currently yield 3.9 percent to 4.6 percent. The strategy here is to have a portion of the money in safe government bonds that will mature very soon. This will give your portfolio flexibility. Meaning, if interest rates continue to go up, you can withdraw the money as it matures and invest in longer term investments that lock in a rate. Or, if we are in a recession, and you are willing to take some equity risks, use that money to buy stocks at cheaper prices.
I would not buy high-yield bonds just yet, but there may be an opportunity soon. If we fall into recession in 2023, despite their higher risk, high-yield bonds, with yields in the 8 percent to 10 percent range, will start to look attractive.
To sum up, in this volatile and global economy, you want a fixed-income portfolio with yields locked in, but also a structure that provides liquidity when opportunities occur.
Read more from Signature Estate & Investment Advisors, LLC