Forever standing on the side of our clients..especially now. See resources we have developed to help through this COVID-19 crisis. Learn More

How are the bond markets responding to the recent market volatility?

It depends, says Jonathan. Not all bonds are created equal. Hear from Jonathan Scheid which sectors of the bond markets are struggling, and which are continuing to provide portfolio stability.

Transcript

Tim Maurer:
Tim Maurer back with another episode of “Ask Buckingham,” a new video podcast, designed to bring clarity in the midst of confusion by connecting your great personal finance questions with straightforward answers from industry thought leaders.

Tim Maurer:
Today’s question will be answered by Jonathan Scheid, Buckingham’s managing director of solutions. And Jonathan, today we’re talking fixed income. How are the bond markets in general responding to this recent market volatility?

Jonathan Scheid:
That’s a great question. And the big answer is it depends.

Tim Maurer:
Of course.

Jonathan Scheid:
I think people think about bonds as a diversifier in a portfolio, right? And that’s always how they’re positioned. But not every bond is the same. Because not every bond is the same, not every bond is going to react the same way to market to clients. There’s a whole section of the bond market that has fallen in line with stocks.

Jonathan Scheid:
Now, they haven’t fallen to the degree that stocks have fallen at kind of the worst spot in all of this market volatility, but if you look at lower grade investment grade bonds, or lower credit investment grade bonds, high yield bonds, emerging market debt, all of those categories have declined at least ten percent this year during this time period.

Tim Maurer:
Wow. Now, when you’re saying lower grade investment grade bonds, can you qualify that a little bit more?

Jonathan Scheid:
Absolutely. So, there’s rating services that will go and rank a bond from a corporation, right?

Tim Maurer:
Mm-hmm (affirmative).

Jonathan Scheid:
So, governments typically get the highest rating and then depending on the size of the company, they’re ability to kind of repay their debts, the amount of debt that they have, the business that they’re in, and the revenues that they collect, that’ll determine their credit worthiness. Kind of like a credit score on us as individuals, but these rating agencies will rank everybody from … you’ll hear terms like “Triple A,” “Double A,” “Single A,” “Triple B,” those four categories are all considered investment grade.

Jonathan Scheid:
Then as you start to move lower on those rankings, you can go all the way down to “C” and that’s in the high yield space, and those aren’t considered investment grade.

Tim Maurer:
Okay.

Jonathan Scheid:
There’s a wide range of bond options out there. So, not everyone is the same.

Tim Maurer:
But to be clear, you’re saying that a bond that might be a corporation that is a household name could be losing money in an environment like this. I don’t think most people would anticipate that that’s possible.

Jonathan Scheid:
That’s right. Well, so if you think about oil companies, right? So, oil companies, their stock prices have fallen quite a bit because the price of oil has declined substantially. Those oil companies also write bonds. And so the same rationale of why you’re worried about the stock price and the future of that oil company being able to make their payments is going to apply to a bond.

Jonathan Scheid:
So, those major oil companies are issuing bonds themselves. People are buying those bonds and now all of a sudden they’re concerned about potentially getting those repaid.

Tim Maurer:
Okay, very interesting. So, what about US government bonds and, say, municipalities?

Jonathan Scheid:
Yeah, so those are typically in the higher end of the investment grade category, and those have actually done pretty well. So, we’ve actually had the higher quality bonds, both government and Triple A and even some Double A categories go up in value during this time.

Tim Maurer:
Yes.

Jonathan Scheid:
And so this is when you hear that terminology of the flight to safety, this is where people are putting their money, right? They are investing in these higher quality bonds, because government bonds are guaranteed by the government, and then the higher quality municipal bonds, those are guaranteed by either the tax authority of a state that’s issuing them, or more the higher quality ones are associated with essential revenues, right?

Jonathan Scheid:
People are going to continue to need to use water and sewage, so those organizations and municipalities that are issuing those debts, they’re usually in good shape regardless of the economic cycle.

Tim Maurer:
Sure. And then what about US government bonds in particular? Is this truly a safe space at this moment in time?

Jonathan Scheid:
Yeah, so I think government bonds are always going to be considered safe when it comes to the repayment of the principle.

Tim Maurer:
Okay.

Jonathan Scheid:
It’s always referred to as the government has a printing press. And so we don’t worry about getting our money back from the government because they can always make more of it.

Tim Maurer:
Mm-hmm (affirmative).

Jonathan Scheid:
The concern that you would have, and the reason you might want to consider globally diversifying into other governments, not just one, would be that inflation could make the money that they give you less than it was when you actually made the investment.

Tim Maurer:
Okay, that makes sense. And especially when we see certain forms of the stimulus measures that the government is putting in place, being in the range of this printing money. Is that possible?

Jonathan Scheid:
It is, and we’ve seen interesting movements in what’s called the yield curve, right? And that’s the trade-off between time and interest that we’re receiving on different bond maturities. And so once the stimulus initiative started to get quantified and we’re hearing the trillion dollar word we actually saw interest rates move up on the longer term side, because people were concerned that it might become inflationary and then it might become too much of a burden for the US.

Jonathan Scheid:
Now, that’s come down a little bit, just as people have understood what the plan is a little bit more and they’ve gotten a little more comfortable with all the investment options out there. But that could change at any time. Right? And that’s the challenge that we try to manage, especially with longer term bonds. We have, as a firm, have a preference of not using longer term bonds because they can become subject to big changes in inflation expectations. And so then we can see larger price swings, and so we try to avoid those price swings. And focus more on the short term side.

Tim Maurer:
So, it sounds like we’re definitely seeing a lot more movement and volatility both in prices and interest rates in the bond market. Maybe not to the degree that we’re seeing in equities, but we’re certainly seeing more movement than usual there. What application might you suggest for investors as they’re looking at the bond portion of their investment portfolio?

Jonathan Scheid:
So, we think it makes sense to stay with our plan and our view on it, and that is a preference towards shorter term to intermediate, high quality, fixed income. We think it’s where you want to keep your safe dollars. Right? Our view on fixed income investing is that we’re more concerned of the return of our money and our investment than the return on our investment. We have stocks in our portfolios for growth. We want to have the bonds in our portfolio for stability and diversification. And for times like this.

Tim Maurer:
For times like this, indeed. Well, thank you, Jonathan Scheid. And thank you for tuning in to this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website: AskBuckingham.com, or emailing your question to question@askbuckingham.com, or just clicking the corner of your screen and it’ll take you directly to the website right while you’re watching this video.

Tim Maurer:
Remember that there are no dumb questions, but unfortunately there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions it will bring a sense of calm and allow you to apply what you’ve learned in pursuit of good decision making. So, please, follow us and by all means Ask Buckingham.

Ask us a question for a video.

Our hope is that in giving you straight answers to some questions weighing on your mind, you’ll be able to apply that knowledge in pursuit of good decision-making. If there is a topic you’d like us to address in a future video, share your idea with us!

Featured Guests

cheri dorsey
Cheri Dorsey
Co-Founder & Owner of Sessa & Dorsey, LLC

Cheri is the co-founder and owner of Sessa & Dorsey, LLC, an estates and trusts boutique law firm practice.

Mike Kenneally
Vice President & Co-Founder at ECD Lacrosse

Mike Kenneally is vice-president and co-founder of East Coast Dyes Lacrosse, a small lacrosse equipment manufacturing company in Maryland.

michael_oneal
Michael O'Neal
Executive Director at OneWorld Health

Michael is the executive director of the global nonprofit One World Health, which partners with communities in developing countries to bring permanent, sustainable healthcare to the chronically underserved.

Moira Somers
Dr. Moira Somers, Ph.D, C.Psych
Neuropsychologist, Professor and Executive Coach

A neuropsychologist, Moira specializes in the growing new field of financial psychology.

Meir Statman
Meir Statman, PhD
Research Advisor

Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University. His research focuses on how investors and money managers make financial decisions and how these decisions are reflected in financial markets.

Featured Associates

Tom Bodin
Tom Bodin
Practice Integration Officer

As a Practice Integration Officer at Buckingham, Tom Bodin provides fractional CFO services to align wealth creation strategies for owners of legal, dental, and medical offices including tax, pension and retirement planning.

Aaron Grey
Aaron Grey
Director of Planning Integration

As the director of planning integration at Buckingham, Aaron helps advisors develop, implement, monitor and update wealth management strategies in pursuit of their clients’ financial goals.

Kevin Grogan
Kevin Grogan
Managing Director, Investment Strategy

Guided by academic research, Kevin Grogan, Director of Investment Strategy, oversees our overall strategy and helps clients and advisors alike distill complex investing topics. 

Jared Hoffman
Jared Hoffman
Managing Director, Relationship Management

As Managing Director at Buckingham, Jared provides education on best practices around cybersecurity. He is a member of Infraguard, a partnership between the FBI and public sector created to share information on cybercrime.

blerina_hysi
Blerina Hysi
Fixed Income Trading Manager

As fixed income trading manager, Blerina helps construct and maintain customized bond portfolios, all with an eye toward finding the best way to implement the client’s comprehensive financial plan.

Jared Kizer, CFA
Chief Investment Officer

As Chief Investment Officer and chair of the firm’s Investment Policy Committee, Jared evaluates findings from academic research and applies that learning to architect the firm’s investment strategy.

Jeffrey Levine
Jeffrey Levine
Director of Advanced Planning

As Director of Advanced Planning, Jeffrey serves as a technical resource for advisors and the firm’s primary thought leader regarding evidence-based planning concepts and strategies.

Irv Rothenberg
Irv Rothenberg
Wealth Advisor (Retired)

A Buckingham wealth advisor (retired) with more than 40 years’ experience, Irv’s passion is helping advisors and their clients create meaningful conversations around important end of life issues.

Jonathan Scheid
Jonathan Scheid, CFA, AIF
Managing Director, Solutions

With over 20 years of experience working with advisors and their clients, Jonathan enjoys sharing interesting perspectives on a wide range of investment and economic topics.

Brant Steck, CFP®
Brant Steck, CFP®
Risk Management Consultant, First Element Insurance Partners

Brant is a Risk Management Consultant at First Element Insurance Partners.

Susan Strasbaugh
Susan Strasbaugh
Wealth Advisor

As part of a firm of fiduciary, fee-only wealth advisors, Susan takes a total-care approach to identifying, organizing, planning, implementing and coordinating clients’ most important financial goals.

Larry Swedroe
Larry Swedroe
Chief Research Officer

As Chief Research Officer, Larry Swedroe has authored or co-authored 16 financial books and devotes all of his time to research and education in the areas of investing, financial planning and behavioral finance.