Bond Concepts by Madison Investments
The fixed income teams at Madison Investments recently published several white papers that discuss how math in the bond markets has dramatically improved for investors. They also highlighted how the intermediate (1-10 year range) part of the yield curve could be the “sweet spot” amid potential interest rate cuts. In this article, we revisit these arguments and introduce additional insights for our readers.
In this article:
- Bond math makes a case for bonds
- Absolute yields
- Real yields
- Relative yields
- Which bonds to target
- Duration per unit of risk
- Absolute spread
- Spread risks
- And more...
The Case for Bonds
Bond Math Looks Easy
Published in October of last year, near the recent peak in interest rates, we argued that the outlook for bond investors had dramatically improved from just a few short years ago when the Federal Reserve (Fed) was still pursuing its Zero Interest Rate Policy. Back then, a drought of yield available not only robbed investors of any reasonable income on their safe investments but also erased any ability for bonds to act as a hedge against rising rates or falling equity prices. With rates having risen dramatically in the past two years, the “bond math” – from both an income and hedging perspective – is much improved.
Since we published that article last October, intermediate and long-term yields have fallen meaningfully, leaving investors and advisors again asking: do bonds still represent value? In this white paper, we use bond math to argue emphatically - yes.
In addition to bond math, there are other ways to illustrate the notable improvement in the outlook for bond investors and the value bonds can offer in an investment strategy. These include absolute, real, and relative yields.
Which Bonds to Target
Duration per unit of risk
In another white paper we released early this year, “Why Accept More Risk for Comparable Yield?”, we argue that intermediate bonds offer greater value than longer-term bonds, at least from an interest rate risk standpoint. A way to measure this is yield per unit of duration.
As we outline in this and previous articles, the return of yield has presented investors with one of the better opportunities of the past 20 years to invest in fixed income. Given the risk dynamics within the bond market and historical yield curve trends, we argue that the intermediate maturity portion of the bond market offers a superior risk/reward profile compared with longer maturity alternatives. For many investors looking for traditional exposure to the domestic bond markets, we believe now is a good time to invest, and intermediate-maturity bonds have the greatest risk-adjusted potential.
BOND CONCEPTS BY MADISON INVESTMENTS
Learn the nuances of fixed income investing, including the risks, opportunities, and investment styles.