Exploring opportunities and risks in fixed income markets (2024)

FAQs

What are the risks of fixed-income market? ›

Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

The Fed Remains Patient

The rise in market rates resulted in negative total returns, with the Bloomberg U.S. Treasury Index returning -0.96% during the quarter. Current market pricing projects three cuts in 2024, more in line with stated Fed projections of 75 bps starting as early as June.

The main factors that impact the prices of fixed-income securities include interest rate changes, default or credit risk, and secondary market liquidity risk.

The type of risk that has the most effect on owners of fixed-income securities is interest rate risk. This is because fixed-income securities, such as bonds, are subject to changes in market interest rates.

Fixed-income provides stability and regular cash flow, while stock investments offer growth over time, albeit at the expense of volatility. So a good investor can design a portfolio with both elements to meet their short- and long-term needs.

With individual bonds so long as the issuer does not default an investor will be paid the bond's par value when the bond matures. A bond fund or bond ETF on the other hand does not mature and its value will fluctuate. While a bond's price can fall, the investor has an option to wait until it matures or is redeemed.

Market Sectors To Watch In 2024

Analysts project 11.5% earnings growth and 5.5% revenue growth for S&P 500 companies in 2024. Fortunately, analysts see positive earnings and revenue growth for all eleven market sectors this year.

A 5-year projected income statement is a financial document forecasting a company's revenue, expenses, and net income over the next five years. It is a crucial tool for long-term financial planning and helps businesses make informed decisions about their growth and investment strategies.

As of the Summary of Economic Projections on June 12, most policymakers anticipated one or two interest rate cuts in 2024. A minority of FOMC members projected rates would not change in 2024 from their current 5.25% to 5.5% range.

Fixed-Income securities are debt instruments that pay a fixed amount of interest, in the form of coupon payments, to investors. The interest payments are commonly distributed semiannually, and the principal is returned to the investor at maturity. Bonds are the most common form of fixed-income securities.

What types of investment have the highest risk? ›

Given the numerous reasons a company's business can decline, stocks are typically riskier than bonds. However, with that higher risk can come higher returns. The market's average annual return is about 10%, not accounting for inflation.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.

Fixed-income securities typically provide lower returns than stocks and other types of investments, making it difficult to grow wealth over time. Additionally, fixed-income investments are subject to interest rate risk.

Risk Consideration

Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates.

All bonds carry some degree of "credit risk," or the risk that the bond issuer may default on one or more payments before the bond reaches maturity. In the event of a default, you may lose some or all of the income you were entitled to, and even some or all of principal amount invested.

With a fixed rate bond you're locking away your money at a fixed rate for a set period. So there is a chance that interest rates may rise during that term, you may not end up earning the best rate possible over the full term of the deal.