Bonds On Guard or Avant-Garde?

Posted by Prospera Financial on February 28, 2023

As Managing Director of Investments & Advisory Solutions, Paul Keeton leads the development and execution of the firm’s advisory program, product offerings, as well as equity and fixed income desks.


The capital markets of 2022 will be remembered for a great many characteristics, perhaps none more so than the outcomes for fixed income markets. For equities, 2022 was a year of disappointment, but hardly historic in its decline. For bonds, it was a year without precedent in the modern era. Interest rates were abruptly pushed to their highest levels in 15 years, and major bond indices fell further than any of the past 40 years. 2022 was truly a generational event for bonds.

A pivot in central bank monetary policy – tightening, not loosening – reacting most notably to widespread inflationary evidence, directly brought dramatic changes in rates, and indirectly to anything they touched.

As it turns out, they “touch” a lot.

The rates directly controlled by the US federal reserve changed with such haste that the behaviors- and portfolios- of fixed income investors reacted just as abruptly. These bond investors were put on guard by an asset class moving inverse to that of sharply rising rates but also in lockstep with a declining equity market. The former is predictable; the latter is less common.

The wake behind an overall market recalibration has, however, created a more avant-garde environment within some previously less-appreciated fixed income securities: stodgy old individual bonds.

As fear and self-preservation created redemptions in bond funds that were the highest on record in 2022, demand for individual bonds, particularly tax-exempt municipal bonds, grew substantially as interest rates rose. Real yield was suddenly available in a manner not seen for years.

This renewed demand for individual bonds comes amidst dislocated credit markets – ample opportunity & volatility already pre-installed. The current environment for credit markets (tenuous) and the general market structure for bonds (decentralized) create important nuances to keep in mind as you consider investments within individual bonds.

For starters, bonds don’t trade on a “centralized” exchange. Investors looking to buy or sell individual bonds must go through dealers, and any single dealer’s inventory can be a poor representation of value existing elsewhere across the market. The bond market is the “Yellowstone” of capital markets. It is a sprawling, $50T marketplace with hundreds of thousands of species (or issuers). All of these bond issues compete regularly for capital, but many don’t have reliably active markets; think Farmers market versus a national grocer.

Successful portfolio construction with bonds is often an exercise in marrying assets to liabilities in an efficient manner. Working with a dedicated professional, familiar with that local market and adept at finding real value along the duration curve, drives that efficiency of a bond portfolio (1). Balancing duration risk and replacement risk, and pairing what is needed with what can be locally sourced, can keep the nuance from being a nuisance.

Prospera has created this white paper to offer more exhaustive information about the fixed income market and things to consider before investing.

Good luck and happy investing,


Paul Keeton
Managing Director, Investments & Advisory Solutions


(1) SEC: “The Municipal Securities Market”
Posted by Prospera Financial