Post by FD1000 on Mar 3, 2023 15:08:04 GMT
(link). This article has several generic points about bonds, income and total returns.
higher yields result in an additional cash coupon return for a given bond position, all else equal. The second driver of higher returns from a higher yield starting point is that yields are more likely to move lower or stabilize after they rose a whole lot. In other words, fixed-income has a fairly strong mean reversion tendency. In short, higher yields make it more appealing to allocate to income securities and vice-versa, all else equal.
Some investors may balk at this suggestion with the view that their game isn't total return but income. That may be fine but that view misses the key point that sustainable income depends on decent total returns. In other words, income and the capital asset base from which it derives are tightly linked. You cannot have a high level of income from a small amount of capital (unless you are taking absurd risks or are fooling yourself). The corollary here is that income investment without regard to total returns is a contradiction in itself as it ignores the very capital base that gives rise to the income in the first place.
Another corollary here is that when yields fall, investors should avoid the temptation to keep the yield of their portfolios the same by looking for assets with higher yields. This typically involves rotating into lower-quality securities when yields fall. This kind of procyclical approach to investing is unlikely to be successful over the longer term.
Income investors don't typically exclusively allocate to very high-quality bonds where the majority of the yield comes from risk-free rates i.e. Treasury yields. Rather, many income investors hold riskier securities where credit spreads contribute a meaningful portion of the overall yield.
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FD: the rest of the article doesn't tell me exactly what to do. I keep it simpler, I don't worry about spreads, when I see an uptrend, I buy.
higher yields result in an additional cash coupon return for a given bond position, all else equal. The second driver of higher returns from a higher yield starting point is that yields are more likely to move lower or stabilize after they rose a whole lot. In other words, fixed-income has a fairly strong mean reversion tendency. In short, higher yields make it more appealing to allocate to income securities and vice-versa, all else equal.
Some investors may balk at this suggestion with the view that their game isn't total return but income. That may be fine but that view misses the key point that sustainable income depends on decent total returns. In other words, income and the capital asset base from which it derives are tightly linked. You cannot have a high level of income from a small amount of capital (unless you are taking absurd risks or are fooling yourself). The corollary here is that income investment without regard to total returns is a contradiction in itself as it ignores the very capital base that gives rise to the income in the first place.
Another corollary here is that when yields fall, investors should avoid the temptation to keep the yield of their portfolios the same by looking for assets with higher yields. This typically involves rotating into lower-quality securities when yields fall. This kind of procyclical approach to investing is unlikely to be successful over the longer term.
Income investors don't typically exclusively allocate to very high-quality bonds where the majority of the yield comes from risk-free rates i.e. Treasury yields. Rather, many income investors hold riskier securities where credit spreads contribute a meaningful portion of the overall yield.
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FD: the rest of the article doesn't tell me exactly what to do. I keep it simpler, I don't worry about spreads, when I see an uptrend, I buy.
