Different Breeds of Bonds

We’ve been writing about low interest rates a lot over the past months and now that they’ve started to move higher we’ve seen a lot of press that it’s a bad time to be invested in “bonds”.

It’s as silly to generalize bonds as it is to think of a Shih Tzu and a Great Dane as the same animal. Sure, they’re both dogs, but owning one versus the other is going to be a very different experience. The same can be said for the bonds in your portfolio.  

Interest rates going up is generally not a great thing for some bonds, but other types have historically done well in these environments. The chart below shows different types of bonds and how they’ve performed since 1992. In the colored boxes on top are bond sector returns and the two line graphs below show the interest rate movements of the Fed Funds rate (purple) and U.S. 10 yr. Treasury (orange). Years in which there were rising rates are highlighted in grey on the bottom so they stand out. 

Bonds

1) Excerpt from Hartford Funds Publication : Managing Risk in Your Fixed Income Portfolio

High Yield Bonds are represented by the Bloomberg Barclays Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Short-Duration Bonds are represented by the Bloomberg Barclays 1-3 Gov’t./Credit Index which is composed of the Bloomberg Barclays Government and Corporate Bond Indexes, including U.S. government Treasury and agency securities as well as corporate and Yankee bonds, with maturities between 1 and 3 years. Municipal Bonds are represented by the Bloomberg Barclays Municipal Index, which covers the USD-denominated long term tax exempt bond market. Long-Duration Bonds are represented by the Bloomberg Barclays U.S. Long Gov’t./Credit Index, which includes all bonds covered by the Bloomberg Barclays Gov’t./Corp. Bond Index with maturities of ten years or longer. Investment Grade Corporate Bonds are represented by the Bloomberg Barclays U.S. Corporate Investment Grade Index which measures the performance of investment grade corporate bonds. U.S. Government Bonds are represented by the Bloomberg Barclays Government Bond Index, which is made up of the Treasury Bond Index and the agency Bond Index, as well as the 1-3 Year Government Index and the 20+ Year Treasury Index. TIPS (Treasury Inflation Protected Securities) are represented by the Bloomberg Barclays U.S. TIPS Index, which represents securities that protect against adverse inflation and provide a minimum level of real returns. Global Government Bonds are represented by the Citigroup World Government Bond Index, which is composed of 14 world government bond markets with maturities of at least 1 year. Bank Loans are represented by the CSFB Leverage Loan Index, which is a representative index of tradable senior-secured U.S. dollar-denominated non-investment grade loans. Cash Investments are represented by the BofAMLUS Treasury Bill 3 Months, which measures the performance of a single issue of outstanding treasury bill which matures closest to, but not beyond, three months from the rebalancing date. EM Debt is represented by the JP Morgan GBI Emerging Markets Global Diversified Index, which is a comprehensive global, local emerging-markets index, and consists of liquid, fixed-rate, domestic-currency government bonds. Diversified Portfolio is represented by an equal portion (12.5% each for1992, 11.1% each for 1993-1997, 10% each from 1998-2001, 9.1% each from 2002-2016) of the previously listed indices. Data Source: Morningstar, Inc., 1/17

 

As you’ll notice if you look at the colored boxes above those grey bars, there were types of bonds that had positive returns in all of those rising rate years. And the white box which shows a blend of the options didn’t fair too terribly either.

So, don’t let the news scare you out of owning bonds. Rising rates may be less favorable for some bong returns, but staying diversified in the space can help to mitigate negative effects.

As always, the important thing to do is to understand the risks that your portfolio is exposed to and make sure they align with your overall investment goals.