Author: Terrell Gates, CEO
In today’s environment, traditional income sources no longer provide investors with the yield they need, so where do you turn?
Advisors have historically used investment grade bonds to deliver both income and protection in their clients’ portfolios. The Fed’s recent signal toward a higher rate environment has already introduced volatility and uncertainty into the fixed income market (Barclays Aggregate Bond Index is yielding 2.49% as of Jan 10, 2016, largely unchanged since before the hike). Such vehicles not only fail to generate sufficient income for clients to meet their needs, but investment grade bonds are particularly susceptible to devaluation—especially with long duration. For example, a hypothetical 10 year corporate bond with a 3% coupon rate, just a 1% increase in interest rates will lead to an 8.8% decrease in price. We saw this general principle in action in May 2013, when a 22 bps rate rise resulted in 30‐Year Treasuries issued that same month trading at almost 13% below face value.