Hi, my name is Bill Phillips, Senior Portfolio Specialist with Sierra
Mutual Funds.
And today's advisor voice is going to cover the topic of bond math.
With yields shooting up.
A lot of advisors are seeking feedback on the fixed income side of their clients
portfolios and invariably when we're looking
at some of the yield sensitive
funds, managers, or ETFs that an advisors
currently using, the conversation comes around to bond math.
So just want to take you through what that means and
how you can use that to really get a feel
for the yield sensitivity on the fixed income side of a client's portfolio.
So if you if you look back historically at the duration
and the yield of the Bloomberg U.S.
Aggregate Bond Index going back to 1976,
it had an average duration of five years
and an average yield of 6.34%.
Now all of that kind of started to change
in around the 2009-2010 time
period coming out of the great financial crisis.
What you see if you look at a chart of duration and yield is they start
the spread starts widening.
And so at the end of last year you had
a duration of 6.8 years
and a yield of only 1.75%.
So again, where the historic average had been
with the yield a little bit higher than duration.
Now the yield is roughly one quarter that of the duration.
So the way to look at
it is from a duration standpoint, you're really four times to the bad.
You don't have that yield cushion in place that you have historically.
And I'll take you through the bond math and I think you'll understand
what I'm saying as far as the
potential risks right now, with the yield sensitive.
So the way you do overly simplify bond math
is you take the duration times
the move in rates, and that's going to be how much you make or lose.
So for example, a 1% rise in rates with a five year duration,
you're going to lose 5% of principal
But if you have 6.34% of income
coming in and and this increase in rates took place over a 12 month period,
you can end up with a net positive
outcome of 1.34%.
Now, remember what I said about the current situation,
a 6.8 year duration and 100 basis
point move higher in rates will result
potentially in a loss of 6.8% And then you only have
1.75% coming back in. So
potentially a total
return loss of 5.05%.
So again, historically, you might actually make money in a rising rate environment.
That doesn't seem to be the case.
And it's playing out.
You know, if you just look at the actual performance of the Agg Bond Index,
you can see bond math in full effect.
You know, 10-year started 2022 at 1.52.
It hit 2.03 on
February 10th.
And the the Agg Bond Index is off to a to a rough start.
So again, overly simplified
bond math but hopefully
hopefully it makes sense.
Hopefully it gives you a feel for
the risks with some of those managers, funds, ETFs
that are yield sensitive and upside down from a duration yield standpoint.
We're always available to have a conversation, run
an analysis of the fixed income side of your portfolio
and give you an honest assessment, honest feedback
as far as overall composition and areas
that you might want to look at tweaking
or maybe everything's good and just get a clean bill of health.
So appreciate the time today and we look forward
to speaking with you and look forward to working with you.
Thank you very much.