Bond & Fixed Income Markets

Higher interest rates decreases demand for older, lower-yielding, bonds, leading to lower bond prices, resulting in capital losses for bond investors. These losses should prove temporary, as bonds must always be repaid in full at maturity, even when market prices go down Higher interest rates increases expected capital gains and dividends for most bond funds, so total returns are higher as well. Higher interest rates cause some short-term pain for bond investors, but the long-term impact is incredibly positive. As such, rising interest rates are a net positive for bond funds, and these are materially stronger investment opportunities today than before interest rates rose Factors Affecting Interest Rates for High-Yield Corporate Bonds For high-yield corporate bond funds, it is the interest rate on non-investment grade corporate bonds that matters the most Benchmark I:USHYBBEY US High Yield BB effective yield First factor is the Federal Funds rate. Fed hikes rates, interest rates go up across the board, and high-yield corporate bonds are no exception. Expectations of Fed hikes matter too, as investors tend to anticipate Fed movements months in advance, and bond prices move accordingly. As an example, this year the Fed started to hike in March, but bond prices started to increase in January. Second factor are interest rate spreads, which are themselves based on current and expected economic conditions. In simple terms, high-yield corporate bonds are risky, so investors will demand a higher interest rate, or a spread, on these bonds relative to safer investments. When times are good, spreads are low as investors believe even the riskier bonds will be repaid in full. When times are not so good, spreads are high, as investors fear their riskier bonds will enter into default. Interest Rates - Impact on Bond Prices Rising interest rates reduce bond prices, leading to lower share prices for most bonds and bond funds, and capital losses for their shareholders. When interest rates rise, older bonds maintain their original rates, while newer bonds must be issued with the newer, higher rates. Selling pressure causes bond prices to decrease, with amounts determined by duration. higher interest rates should lead to lower bond prices / bond fund share prices.As such, bond ETFs should move in-line with their benchmark asset class, and should have seen lower share prices as interest rates rose. Positive real yields now exist, with bond yields higher than expected inflation over the next five years and beyond. Corporates, municipals, high yield, and emerging markets present more opportunity than any time in the recent past. TINA has resigned—bonds offer an alternative with reasonable income again and have reestablished their role as a portfolio hedge to equity risk. Credit spreads widened over the quarter as markets adjusted to tighter financial conditions and higher recession risks. Risk premiums needed to rise to compensate investors for the downside potential of aggressive central bank policy