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Fixed-income investors now have to navigate the kind of volatility usually reserved for stocks .

By Jennifer Lea Reed

“ it has been a volatile start to the year across asset classes , and particularly in bonds , so this is a good time to look at long-term portfolio construction . Discipline is really important ,” says Margaret steinbach , a fixedincome investment director at giant Capital Group . “ Try to look through the current volatility . There ’ s an important role for financial advisors in helping investors focus on the long view , especially when the human inclination is to pull out of the market .”

And if those same financial advisors haven ’ t yet figured out a plan to approach the greatest bond volatility since the 1980s , they ’ re running the risk of being reactive , not proactive , sources say . But opinions seemed to vary on what the plan should be , so maybe there ’ s still some time to tinker with portfolios and come out a winner .

“ By the time you start thinking about doing something differently , the time for that has passed ,” says Michael Dow , chief investment officer and CFA at Beacon Pointe , headquartered in Newport Beach , Calif . “ Part of our jobs in the investments office is to forecast investment returns . The Beacon Pointe investment committee meets once a quarter . in the morning , we ’ re looking at hundreds of charts and graphs on the macro economy . in the afternoon , we look at asset allocation and investments for the short term , mid-term and long term .”

Dow , like the other investment officers interviewed for this article , says one of the major drivers of the current investment environment was set two years ago in response to the pandemic . “ We were just coming out of the disaster of late February and March , the government was cranking up the printing press , and the Treasury Department was issuing bonds hand over fist . And that was the proper response ; it was the right thing to do ,” he says .

“ But there ’ s a bill to pay for all that stimulus , and that comes in the form of a higher debt to GDP ratio and a larger monetary base ,” he continued . “ When you have that and you ’ re the federal government , it ’ s necessary to try to keep interest rates low , because all the current debt has to be rolled over into new debt , and if you replace cheaper bonds with higher coupon bonds , you ’ ll have to squeeze taxpayers to make ends meet .”

Adding higher inflation to the mix doesn ’ t pose a problem by itself , since paying back debt with devalued dollars is a common strategy to reduce debt and is relatively painless , Dow says . “ However , the combination of low nominal interest rates and higher inflation leads to negative real interest rates . Nega-

58 | financial advisor magazine | may 2022 www . fa-mag . com