FAQ: Fixed Income & Volatility

May 26, 2022

The past few weeks, months, and even years have been chaotic to say the least. We’ve invested through a global pandemic, supply chain backlogs, and war – it seems like investors can’t catch a break, especially with the recent selloff. The latest hurdle is in navigating seven straight weeks of stock market red as the Fed fights inflation, and as we move even later into the economic cycle.

As markets work through the volatility, we know many investors are asking how to handle these market conditions. We’re seeing reoccurring questions and concerns on what to expect going forward. We don’t have a crystal ball to know exactly what’s going to happen next, sadly, but what we do have at Manning & Napier is an award-winning Investment Research team to share their insights on current fixed income market conditions.

  1. Why are financial markets going down, and when will it end?

All areas of the bond market have been feeling pressure this year from ongoing rate increases. Yields are rising as markets price in higher-than-expected inflation and more hawkish monetary policy from the Federal Reserve. The Fed is tightening, and it is expected to continue aggressively tightening financial conditions ahead as they’ve become increasingly concerned with corralling inflation, which remains well above their target level. Tighter financial conditions are the conduit by which the Fed’s tools work and typically results in higher real interest rates, more conservative credit conditions for borrowing, and potentially adverse impacts on financial market asset prices.

These possible market impacts are why selloffs are often a symptom of fighting inflation. Market pressure is likely to end when either valuations become so attractive for market participants that they feel the compensation is worth the risk, and/or if policy is deemed tight enough for inflation to moderate and no longer needs aggressive central bank tightening.

  1. What’s the role of bonds in my portfolio?

Bonds have several roles in client portfolios. Primarily, fixed income is a diversifying force for the efficient frontier of client portfolios due to lower volatility and typically uncorrelated returns with riskier assets like equities. Some segments of client fixed income holdings, like US Treasuries, are the stabilizer of a portfolio during times of stress. Meanwhile other sectors, like credit, are able to provide both income and capital appreciation potential, as well as lower levels of risk, by being higher up in the capital structure than equities.

  1. If rates are rising, what’s the point of owning bonds?

As interest rates increase, the earned yield (i.e., interest income) and the bond’s principal payments can both be reinvested at higher rates, providing better future returns for client portfolios. While it can be a difficult environment for markets as interest rates increase, the potential for future returns subsequently increases as well.

A risk-conscience approach that balances the short- and long-term tradeoffs is essential to make sure you are being compensated for the appropriate amount of risk. While we don’t know exactly what’s going to happen next, we can offer reassurance that our processes and long-term outlook allow us – and portfolios – to stay disciplined to client’s individual goals and objectives.

For more on inflation’s impact on fixed income portfolios, check out our recent From the Desk letter, in which our Managing Director of Fixed Income further dissects the rising rate environment, whether or not inflation has reached an inflection point, and portfolio construction considerations to prepare for a potential regime change.

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This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.


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