Diversification does not ensure against loss. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
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Saved Content And Share Content. My Content You have not saved any content. Manage Subscriptions. Your Email Address. Recipient Email Address Please enter valid address Email address is required. My Profile. Filters: Reset All. After an issuer sells a bond, it can be bought and sold in the secondary market, where prices can fluctuate depending on changes in economic outlook, the credit quality of the bond or issuer, and supply and demand, among other factors.
Broker-dealers are the main buyers and sellers in the secondary market for bonds, and retail investors typically purchase bonds through them, either directly as a client or indirectly through mutual funds and exchange-traded funds. Bond investors can choose from many different investment strategies, depending on the role or roles that bonds will play in their investment portfolios. Passive investment strategies include buying and holding bonds until maturity and investing in bond funds or portfolios that track bond indexes.
Passive approaches may suit investors seeking some of the traditional benefits of bonds, such as capital preservation, income and diversification, but they do not attempt to capitalize on the interest rate, credit or market environment.
Active investment strategies, by contrast, try to outperform bond indexes, often by buying and selling bonds to take advantage of price movements. The interest rate environment affects the prices buy-and-hold investors pay for bonds when they first invest and again when they need to reinvest their money at maturity.
Strategies have evolved that can help buy-and-hold investors manage this inherent interest rate risk. One of the most popular is the bond ladder. A laddered bond portfolio is invested equally in bonds maturing periodically, usually every year or every other year.
As the bonds mature, money is reinvested to maintain the maturity ladder. Investors typically use the laddered approach to match a steady liability stream and to reduce the risk of having to reinvest a significant portion of their money in a low interest-rate environment.
Another buy-and-hold approach is the barbell, in which money is invested in a combination of short-term and long-term bonds; as the short-term bonds mature, investors can reinvest to take advantage of market opportunities while the long-term bonds provide attractive coupon rates. Other passive strategies : Investors seeking the traditional benefits of bonds may also choose from passive investment strategies that attempt to match the performance of bond indexes.
For example, a core bond portfolio in the U. Aggregate Index, as a performance benchmark , or guideline. Similar to equity indexes, bond indexes are transparent the securities in it are known and performance is updated and published daily. In these passive bond strategies, portfolio managers change the composition of their portfolios if and when the corresponding indexes change but do not generally make independent decisions on buying and selling bonds.
Active strategies : Investors who aim to outperform bond indexes use actively managed bond strategies. Active portfolio managers can attempt to maximize income or capital price appreciation from bonds, or both.
Many bond portfolios managed for institutional investors, many bond mutual funds and an increasing number of ETFs are actively managed. One of the most widely used active approaches is known as total return investing, which uses a variety of strategies to maximize capital appreciation.
A major contention in this debate is whether the bond market is too efficient to allow active managers to consistently outperform the market itself. An active bond manager, such as PIMCO, would counter this argument by noting that both size and flexibility help enable active managers to optimize short- and long-term trends in efforts to outperform the market.
Active managers can also manage the interest rate, credit and other potential risks in bond portfolios as market conditions change in an effort to protect investment returns. We believe the municipal markets should remain strong into , although the good news may already be baked into high quality bond valuations.
Before Economic Forums were mainstream on Wall Street, our investment professionals were gathering to identify economic and market trends for our clients. Decades later, the cornerstone of our process is stronger and more important than ever. This short video will help you set objectives for clients and construct better fixed income portfolios. Past performance is not a guarantee or a reliable indicator of future results.
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk.
Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax.
Certain U. Obligations of U. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Inflation-linked bonds ILBs issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise.
Diversification does not ensure against loss. 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. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Select basic ads. Create a personalised ads profile.
Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Like stocks , after issuance in the primary market , bonds are traded between investors in the secondary market. However, unlike stocks, most bonds are not traded in the secondary market via exchanges. Rather, bonds are traded over the counter OTC. There are several reasons why most bonds are traded OTC, but chief among them is their diversity.
Before looking at the bond market, let's consider how stocks commonly trade. Stocks have two primary types, common stock or preferred stock , and are limited to just a few characteristics. Bonds, on the other hand, each have different qualities, maturities, and yields. The outcome of this diversity is more issuers, and issues of bonds with different characteristics, which makes it difficult for bonds to be traded on exchanges.
Another reason why bonds are traded over the counter is the difficulty in listing current prices. In contrast, bond prices are affected by changing interest rates and credit ratings. Since trade time between issues can last weeks or even months, it is difficult to list current prices for a particular bond issue, which would make it challenging to trade bonds on the stock market.
Most corporate bonds issued by private and public corporations are traded OTC rather than listed on exchanges.
Furthermore, many of the transactions involving exchange-traded bonds are done through OTC markets. Corporate bonds are issued by firms to raise capital to fund various expenditures. They are attractive to investors because they provide much higher yields than bonds issued by the government.
However, this higher yield is accompanied by higher risk. Investment in corporate bonds comes primarily from pension funds, mutual funds, banks, insurance companies, and individual investors.
The bonds that are traded on the OTC markets vary in the degree of liquidity that they enjoy. Liquidity gives investors ample opportunity to buy and sell bonds before maturity at fair prices. Along this liquidity, corporate bonds traded OTC provide investors with a steady stream of income and security because they are rated based on the credit history of the issuing firm. However, these bonds are not perfect investments, and they include major risks, such as credit risk and call risk.
Credit risk can arise when an issuer is unable to maintain payments on the bond or if a rating corporation lowers the credit rating of the issuer. Call risk occurs when an issuer redeems the issue before maturity, leaving the investor with less favorable investing possibilities. Many analysts and pundits claim that over-the-counter OTC transactions and financial instruments, especially derivatives, increase systematic risk.
In particular, concerns about counterparty risk grew following the financial crisis of , when credit-default swaps in the derivatives market received much of the blame for massive losses in the financial sector.
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