Working with financial advisors is my privilege.  Taking care of clients is theirs.

During my travels this month, a regular theme of “yield” came up.  In my conversations, Financial Advisors were giving careful thought to interest rates, rate changes, and risk.  Risk is everchanging in fixed income with the common understanding is that “the more yield, the more risk.” 

On an average Saturday after a trip to California, Oregon, and Washington, I was having dinner with a few friends, when one said, “Jim, money market yields are dropping, what do you think about private credit?”  I paused, wondering what the right thing to say was, then I said (edited for brevity and language), “Do you know the leap in risk from ~4% to ~12% in yield?” 

Fixed Income Risk Explained

Interest Rate Risk – This is the early part of the question asked by my friend and goes in both directions, lower and higher yields.  If yields are going higher, fixed income principal goes down.  If yields are going down, fixed income principal goes higher, a good thing, unless you are searching for that old yield, which will be taking on more risk.

Default Risk – Often associated with owning an individual bond, we saw how an entire sector can be affected by default risk in the real estate crisis of 2009 (see part 2 under Liquidity Risk).  Diversifying holdings and hiring a professional manager can help mitigate default risk.

Inflation Risk – Primarily related to a potential loss of purchasing power.  Inflation and interest rates regularly change, but in general, if inflation is 8% and you are earning 5%, the concept suggests that you are losing purchasing power.

Liquidity Risk – As the title suggests, you can’t sell the bond you own at a fair price, not unlike trying to sell a home in a bad real estate market.  Part 2 of the real estate crisis of 2009, where the Federal Reserve began the year purchasing approximately $1.25 trillion in Mortgage-Backed Securities (MBS).

Other risks include reinvestment risk, reinvesting proceeds at lower yields.  Prepayment risk, often associated with MBS if mortgage rates fall.  Foreign bonds carry additional risks, like currency risk and taxes. 

The important take away is more yield = more risk.  Knowing when a particular risk is higher or lower can play a big role in the long-term success of the fixed income part of your investment.

For more information on Strategas Fixed Income products, please click here: Strategas Asset Management Fixed Income

This communication was prepared by Strategas (“we,” “us,” or “our”), a brand that offers investment advisory services through Strategas Asset Management, LLC, an SEC Registered Investment Adviser, and provides research to institutional investors through Strategas Securities, LLC, a broker-dealer and FINRA member firm and an SEC Registered Investment Adviser. Information regarding market or economic trends, or the factors influencing historical or future performance, reflects the opinions of management as of the date of this communication, and are subject to change. This communication is provided for informational purposes only and should not be construed as an offer, recommendation, nor solicitation to buy or sell any specific security, strategy, or investment product. The information contained herein has been obtained from sources we believe to be reliable, but no guarantee of accuracy can be made. This communication does not constitute, nor should it be regarded as, investment research or a research report or securities recommendation and it does not provide information reasonably sufficient upon which to base an investment decision. This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.

Strategas Asset Management, LLC and Strategas Securities, LLC are affiliated with Robert W. Baird & Co. Incorporated ("Baird"), a broker-dealer and FINRA member firm, and an SEC Registered Investment Adviser, although the firms conduct separate and distinct businesses.