when interest rates riseThe yield curve flattened over the first quarter of 2017. Longer-term Treasury yields fell, as investors became increasingly skeptical about the Trump administration’s ability to enact the expansionary policies that markets had priced in during the fourth quarter of 2016.  Additionally, a record short position in long-dated Treasury futures accumulated over February and the decline in rates in March led to a short squeeze, which exacerbated the downward move in longer-term rates. The front end of the Treasury yield curve was pressured higher by the Federal Reserve’s (Fed) decision to raise the fed funds rate during its March 14–15 meeting. The rate hike was not expected by the market early in the year, but hawkish Fed speaker rhetoric prepared markets, which largely took the rate hike in stride.

Economically sensitive sectors of the bond market were aided by investors’ ongoing search for income in a low-yield, low-return environment and by steady economic data, which pushed equity markets higher as well. The higher interest rate sensitivity of longer-dated fixed income was a tailwind amid the overall decline in longer-term Treasury yields. More economically sensitive, lower-rated sectors tended to outperform higher-quality sectors. In general, we prefer to look domestically for
income-generating investments given the more favorable economic backdrop, which should continue to support credit quality. Currently, our best ideas for potential income generation are:

  • High-yield bonds (taxable and tax-free)
  • Bank loans (floating rate funds)
  • Preferred stocks
  • Investment-grade corporate bonds (intermediate and long term)
  • Emerging market debt (EMD)

The LPL Research Income Focused models within Model Wealth Portfolios (MWP), which combines multiple asset classes and sectors, provides exposure to several of these ideas. These portfolios’ goals are to seek excess total return and, secondarily, to pursue higher overall yields than the LPL Research blended benchmarks.

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Disclosure: This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

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