Dear clients and friends,
The yield curve for corporate bonds has become almost completely flat. What this means is that a 5 year bond is yielding (paying) almost exactly what a 1 year bond is yielding. Normally, you would earn more interest for longer bonds than for shorter ones. Right now, this is not the case, at least on the bonds that we are using. This has happened because the longer bonds have gone up in price, driving the yield lower which is of course a good thing.
We will be selling these longer bonds and moving to shorter bonds. Ideally the yield curve will regain its normal shape or interest rates will go up, at which point we will buy those longer bonds back at a lower price and a higher yield. Since they are currently all earning the same amount, we won’t be giving up potential interest while we wait for this to happen. If interest rates fall farther, then we could miss out on some potential interest, but in our opinion that risk is low.
In the high yield portion of our portfolios, we will be likewise shortening our bond ladders both for this reason, as well as because of potential price risk if recession fears increase.
Overall this is NOT a big move, but we believe it will be a bit safer, as well as hopefully earn a bit more on the fixed income portion of our portfolio once this weird pricing corrects.
As always, please don’t hesitate to contact us with any specific questions or concerns you may have.
Sincerely,
Alex Parrs
Investment Advisor
alex.parrs@ironwoodfinancial.com
