Kevin Slater, CEO, SoundView Advisors

There are three roles Fixed Income plays in a portfolio:

1. Generating income

2. Reducing volatility

3. Preserving capital for reinvestment after an equity market downturn

Interest rates are historically low, causing investors to receive reduced levels of income and be exposed to higher-than-average volatility due to potentially rising interest rates (the value of a bond portfolio moves inversely to interest rates).

Even as governments and corporations take advantage of low rates to issue massive amounts of new debt, economic conditions are adversely affecting organizations’ ability to make their payment. In fact, 2020 saw the greatest number of bond defaults in the past decade. 

We will be making a number of trades in the fixed-income portion of portfolios over the next few weeks. The changes are to protect client portfolios by improving the overall quality of our funds (to reduce the risk of bond defaults) and shortening their average duration (to dampen the impact of rising interest rates). 

Aside from allocations to Treasury Inflation Protected Securities (TIPs), we are avoiding bond index funds in favor of actively managed funds, where there is the freedom to manage more conservatively.