Putting the Income Back in “Fixed Income.”

Is it time to take a fresh look at bonds for your investment portfolio? 

While high quality bonds are often considered a “steady Eddie” asset class, they have behaved more oddly this year than in recent (or distant) memory. However, they haven’t grabbed the headlines like their volatile equity counterparts. 

To start 2022, the U.S. Aggregate Bond Index fell nearly 8% through the end of July, [1] largely because of meaningfully consistent interest rate hikes by the Federal Reserve in the face of inflation levels not seen in decades. In anticipation of such rate hikes, Evermay’s positioning with respect to bonds has been to target short maturities, significantly dampening the negative effects of rising rates on our fixed income portfolios. 

While the path of interest rates from here remains unknown, the Federal Funds rate currently sits at 2.25-2.50%, [2] levels not seen since mid-2019. As a result, yields on short-term bonds, and U.S. Treasuries in particular, have moved notably higher to relatively attractive levels. As of this writing, the current yield on a one-year Treasury is approximately 3%. [3] While not overly inspiring, we bring this to your attention because many clients have “safe” money reserved in savings/checking accounts, CDs, etc. earning significantly less on a nominal basis, and losing more on an inflation-adjusted (real) basis. 

At a time when every incremental amount of positive return is important, we feel considering U.S. Treasuries or similar instruments, where appropriate, can be helpful. While banks have FDIC guarantees on deposits, Treasuries are backed by the full faith and credit of the U.S. Government. Also, bank interest is taxed at both the federal and state tax level while interest on Treasuries is free of state tax, resulting in an even greater after-tax return. 

Please let us know if you’d like to learn more or if considering alternatives to traditional savings vehicles is of interest. We feel there is an opportunity to take advantage of the recent rise in interest rates and look forward to knowing how this approach may be helpful to you. 

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[1] US Aggregate Bond Index ETF (AGG) year-to-date return as of 7/29/2022.  Source: FactSet

[2] Fed Funds Rate source: CNBC

[3] FactSet

Blog commentary and opinions expressed herein represent a snapshot in time and are subject to change. Any discussion or information contained in this blog does not serve as the receipt of, or substitute for, personalized investment advice from Evermay.