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April 15, 2024
April 03, 2024
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Financial Industry Insights from Advisors Asset Management
On June 14, 2013
Positioning Portfolios for Volatile Markets
The 10-year U.S. Treasury yield has moved up from 1.62% on May 2 to a level near 2.2% and clients are asking how to position their fixed income portfolio during volatile markets. We believe the volatility will likely continue and before looking at the steps you can take to position your portfolio, let’s look at some notable news:
At AAM we have been educating advisors on navigating business and economic cycles for years (ask your sales representative for information - Navigating Market Cycles). We have also been utilizing tactical duration management and actively adjusting duration targets during markets such as this. Our method includes utilizing embedded calls and high coupon bonds to help limit portfolio volatility. For example, an individual owning an AA corporate bond with a 3.85% coupon and maturity in 2043 may have seen principal erosion from May 2, 2013 to June 10, 2013 of approximately 11%. Conversely, a corporate bond with similar credit rating and maturity date, but a slightly higher coupon of 5.375%, would have seen a loss of principal of 7%. Although we are not suggesting buying long paper such as this, the purpose of the example is to show the importance of watching duration and utilizing premium bonds.
This market is likely to remain volatile for the foreseeable future and although we believe over the long term there is an upward bias in rates, there may be periods where we see the flight back to quality and yields decrease. Regardless, we continue to take a defensive approach by buying high-coupon bonds and keeping an eye on your portfolio duration to limit principal volatility. Market conditions constantly change, and you need to look for opportunities in each asset class for allocation changes and bond swaps to take advantage of these conditions. You may also be interested in Why Would Anyone Pay a Premium for a Bond? By Mark Gregg, as it explains the case for purchasing these bonds in detail.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.
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