New York, NY – Bond yields play a crucial role in identifying fixed-income opportunities as they reflect the total return potential based on a bond’s price and coupon payments. These yields can vary across different bond sectors and change over time. The spread, which indicates the difference between a bond’s yield and the yield of a risk-free issue with the same duration (such as U.S. Treasuries), shows how investors are compensated for taking on additional credit risk. When spreads are above their long-term average, investors receive higher compensation for credit risk, while below-average spreads indicate lower compensation.
To assist investors in navigating fixed-income markets, the proprietary Fixed-Income Monitor provides a historical comparison of yields and credit spreads over 20 years. This tool aids in identifying opportunities and risks within the asset class. The latest data from the monitor reveals that falling Treasury yields in May supported fixed-income returns, driven by progress on inflation that left the possibility of a Fed rate cut in September open.
The interest rate rally benefitted high-quality spread sectors like Agency MBS and investment-grade corporates, allowing investors to capitalize on the “higher-for-longer” Fed outlook. However, municipal bonds faced challenges in May, delivering negative total returns due to a surge in new supply issuance. This increase, estimated at 35% higher than the same period last year, resulted from municipalities holding back bond sales during a period of low demand caused by interest rate volatility.
It is essential to understand the risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment/extension risk. Bond prices tend to rise when interest rates fall and vice versa, with longer-term securities experiencing more significant price fluctuations. Furthermore, mortgage- and asset-backed securities are influenced by various factors such as interest rates, issuer/originator financial health, and creditworthiness of entities providing credit enhancements. Investors should carefully consider these factors before making investment decisions.
In conclusion, the fixed-income landscape presents both opportunities and risks for investors, with varying market conditions impacting investment performance. By staying informed and understanding the nuances of fixed-income instruments, investors can navigate these challenges and make informed decisions to achieve their financial goals.
