Fixed Income As A Diversifier

Historically, the bond market has been a pretty good indicator of increased potential for economic and geopolitical risk, and thus far we see little stress evident in the fixed income markets. Nonetheless, higher rates of economic growth and inflation, along with the potential that the Federal Reserve will begin balance sheet normalization this year, may put bond prices under pressure moving forward.

Despite our expectation for muted bond market performance in the second half of 2017, we continue to believe fixed income plays a vital role in a well-diversified portfolio, providing income and liquidity during times of market stress. High-quality bonds serve as an important diversifier as well, helping to manage portfolio risk. And, although the absolute return may be minimal, high-quality fixed income’s value as a risk mitigation tool should be emphasized in the fixed income portion of one’s diversified investment portfolio.

As seen in the chart, high-quality fixed income sectors as represented by their corresponding Bloomberg Barclays Indexes, have shown negative correlation (one variable increases as the other decreases) to the S&P 500 Index. For example, when stocks experienced a short sell-off from December 1, 2015 through February 14, 2016, the S&P 500 Index return was -11.3%. During this same time period, the bond market, as represented by the Bloomberg Barclays Aggregate Index, returned 3.1%. So in this example, by diversifying into high-quality fixed income sectors, investors may have been able to diversify away some of the market volatility.

 

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

The Bloomberg Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The economic forecasts set forth in the presentation may not develop as predicted.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

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