Markets

3 year-end bond moves to consider

Rawpixel
Rawpixel

I still have a land line phone. I never use it, no one I know calls me on it, but every month I pay the bill, almost without thinking about it. Staying tethered to the service is simply a habit (one I'm determined to break as part of my year-end checklist.) A similar thing has been happening in the bond market. In the decade since the financial crisis, "lower for longer" has been the mantra for interest rates. Ten years is a long time, and in the interim many bond investors have acquired the "muscle memory" of stretching for yield to meet their income goals. Now that the Fed is gradually raising its policy rate, however, it may be time for investors to break the habit of outsized credit and liquidity risks, and learn a new routine. The low rate environment had a big impact on how portfolios were constructed over the last decade. Not only have intermediate bond managers tilted into high-yield, emerging markets and loans but many investors also have strayed out of bonds altogether, into dividend-paying stocks. As we can see in the chart, since 2008 the median intermediate-term bond fund (green line) has become increasingly correlated to the stock market. Correlations dropped sharply in 2014, but have been inching up again.

Why is this a problem? The reach for yield reduces the potential diversification benefits of owning bonds by increasing correlations to stocks. In other words, many of us likely have strayed from a primary purpose of owning bonds: offsetting the risk of stock volatility, something we've had no shortage of lately. [storytout]Learn how the pros use bond ETFs . [/storytout] The good news is that we now have an opportunity to course-correct. And now, as you do a bit of year-end financial housekeeping, is a good time to revisit how you are sourcing yield and at what price.

Here are three simple things to consider:

(1) Consider short maturity bonds.

(2) Rotate up in credit quality.

SHY NEAR [1]

(3) Keep more of what you earn.

Heather Brownlie

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks

Latest Markets Videos

    BlackRock

    BlackRock offers breadth of capabilities - and depth of knowledge – across active and passive strategies, including iShares® ETFs. This is combined with a singular focus on delivering strong, consistent performance and an ability to look across asset classes, geographies and investment strategies to find the right solutions.

    Learn More