Fixed Income

Fixed income investing in a low interest rate world

By Roberto Roffo – Managing Director and Lead Portfolio Manager, SWBC Investment Company
Feb 15, 2021

With most investment-grade bonds around the world yielding 1% or less, it’s difficult for safety-conscious fixed income investors to structure a portfolio that provides sufficient cash flow. Prior to this recent slight rise in U.S. Treasury yields, over 60% of the global bond market had yields below 1%. This is in comparison to the 1990s, when less than 10% of the market had yields below 2%.

With yields close to historic lows, the driving factor has been an easy cash policy that world governments have put in place. The United States is a large part of the global market and since the economic shut down due to Covid-19, the United States policy has gone beyond easy cash to something described as “throwing money” at whatever part of the economy needs it. Additionally, the Federal Reserve recently stated that they will keep interest rates low for as long as needed.

The municipal bond market is roughly 5 percent of the overall global bond market, and has been a major recipient of the easy money policy. Whereas interest rates have fallen precipitously and high-grade, long-term municipal bonds are yielding below 1.50 percent, there are many opportunities to take advantage of if you understand municipal Bonds. One must keep in mind that historically, municipal bonds are the second safest fixed income product behind U.S. sovereign debt with a default rate below 1%, well under corporate bonds, and a recovery rate well above corporate bonds.

The municipal bond market is significantly more complicated than most other fixed income markets and performing your due diligence or turning to a professional will allow you to earn yields well above the average seen in the investment grade global bond markets. For example, due to the tax advantages of municipal bonds, a 2% tax-exempt yield is a taxable equivalent yield of approximately 3%, which is nicely above any highly-rated sovereign debt and more attractive than a lower-rated corporate debt than lower-rated corporate debt one would have to buy to achieve a 3 percent yield.

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With the new presidential administration stated intent of raising taxes, the tax advantage provided by municipal bonds becomes even more pronounced. This has been demonstrated by the large inflows of cash into the market since the beginning of the year. The demand for municipal bonds should continue -if not get stronger – as the rhetoric for higher taxes increases, which will help the relative performance of the municipal bonds regardless of the direction of Treasury yields.

SWBC Investment Services provides comprehensive and holistic financial planning to businesses, financial institutions, and individuals. To meet our team and learn how we can craft a customized funding strategy or financial plan for you, click here.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund. This and other important information about the Fund is contained in the prospectus and should be read carefully before investing. Investment in the Funds, involves a degree of risk, including but not limited to the risks that the sectors within the Funds perform unfavorably, market return expectations change with respect to yielding investments, and interest rates rise.

Source: Fixed income investing in a low interest rate world

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