The war in Iran has created uncertainty in both the equity markets and the bond markets, as even the Federal Reserve acknowledged in its recent decision to hold interest rates steady. In this episode of WashingtonWise, Collin Martin, head of fixed income research and strategy at Charles Schwab, joins host Mike Townsend to discuss how fixed income investors can navigate the unusual volatility in the bond market. Collin shares his perspective on next steps for the Fed, whether bonds are still the safe haven investors perceive them to be, and the war’s implications for the U.S. dollar. He dives into the potential for elevated Treasury yields due to changing patterns in bond market ownership and looks at how the private credit markets have been roiled by growing investor concerns. And he provides his thoughts on what investors looking to help protect their portfolios should be focusing on in the bond market.
Mike also provides the latest on key issues in Washington, including the looming fight on Capitol Hill over additional funding for the war effort, the ongoing shutdown of the Department of Homeland Security, and the White House issuing a plan for regulating artificial intelligence.
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Performance may be affected by risks associated with non-diversification, including investments in specific countries or sectors. Additional risks may also include, but are not limited to, investments in foreign securities, especially emerging markets, real estate investment trusts (REITs), fixed income, municipal securities including state specific municipal securities, small capitalization securities and commodities. Each individual investor should consider these risks carefully before investing in a particular security or strategy.
Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.
Bank loans typically have below investment-grade credit ratings and may be subject to more credit risk, including the risk of nonpayment of principal or interest. Most bank loans have floating coupon rates that are tied to short-term reference rates like the Secured Overnight Financing Rate (SOFR), so substantial increases in interest rates may make it more difficult for issuers to service their debt and cause an increase in loan defaults. A rise in short-term references rates typically result in higher income payments for investors, however. Bank loans are typically secured by collateral posted by the issuer, or guarantees of its affiliates, the value of which may decline and be insufficient to cover repayment of the loan. Many loans are relatively illiquid or are subject to restrictions on resales, have delayed settlement periods, and may be difficult to value. Bank loans are also subject to maturity extension risk and prepayment risk.
Mortgage-backed securities (MBS) may be more sensitive to interest rate changes than other fixed income investments. They are subject to extension risk, where borrowers extend the duration of their mortgages as interest rates rise, and prepayment risk, where borrowers pay off their mortgages earlier as interest rates fall. These risks may reduce returns.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid marke…
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