Second Quarter, 2023

Bonds, What Are They Good For?

Past investment history shows that stocks outperform bonds over long periods of time but with much more volatility. This 2Q23 letter suggests that investors, however, should look to the future, not the past, to assess the prospects of bond investing going forward.

Simple math lesson #1 re: bonds:  Total return = change in price + interest received.

Simple math lesson #2:  When interest rates go up, prices of bonds must go down to equalize existing bonds to new ones.

The silver lining is now bondholders get paid higher interest going forward to compensate for lower prices.

And assuming no defaults or downgrades, bond prices rise from lower levels to par value of 100 as time passes.

KEY MAGIC INGREDIENT = PATIENCE.  Patience can pay off as future returns from rising prices and higher interest received can improve total return as time passes (remember math lesson #1.)

Recently as the Federal Reserve has battled high inflation by rapidly raising interest rates, The Bloomberg Aggregate Bond Index lost 15% in 2022, according to FactSet. So why bonds now? Look to the future, not the past. The combination of lower prices and higher yields now bodes well for the future of bond investing. Current higher market interest rates can set bond investors up for attractive future total returns.  Back to simple math lesson #1: Total return = change in price + interest received going forward.

Let’s use our W&A actively managed portfolio of five diversified bond mutual funds as an example:  Current average price = $89.15. Current yield = 5.28%. Opportunistic cash in the portfolio to put to work = 24%.  W&A clients are looking to the future, not the past, to assess the potential for “Bonds, What Are They Good for Now?”

– Phyllis

Sources include: FactSet, NY Times, YCharts

Author: Senior Vice President Senior Wealth StrategistPhyllis had been associated with W&A for a number of years before joining the firm, acting as a consultant to the company in its formative stage and subsequently as a client. Prior to joining W&A, Phyllis served as Vice President, Corporate Finance at Morgan Keegan & Company, Inc. She was involved in all aspects of its investment banking activities, including mergers and acquisitions, valuation studies, and initial public offerings. She earned registrations in NASD Series 7 (Registered Representative) and Series 63 (Blue Sky). Phyllis holds an MBA in Finance as well as M.Ed and BBA degrees from the University of Memphis. She is a Chartered Financial AnalystTM(CFA®) and a Certified Financial PlannerTM(CFP®) Licensee. She is past-Chairman and past-President of the Mid-South Society of the Financial Planning Association (FPA) and served on their Board of Directors from 1995 to 2000. During her term as President in 1998, the Mid- South Society of FPA was chosen the Outstanding Society of the Year by the national FPA organization. Her community volunteer activities include MIFA and the Women’s Foundation for a Greater Memphis, where she served as Treasurer, Chair of the Finance Committee and currently chairs the Investment Committee. She also serves on the Board of Governors of The Seaside Institute in Seaside, FL.

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