Greenville, South Carolina, 8th July 2022, ZEXPRWIRE, The bonds market is in a downturn, with interest rates on the rise. For investors looking for stability and yield, what are the alternatives? Shari Mattingly Bevan of Bevan Wealth and Tax Strategies offers her insights.
The first quarter of 2022 was negative on nearly every front for investors. The S&P 500 lost more than 5%, while international stocks lost more than 6%. The Russell 2000, which represents U.S. small-cap stocks, declined nearly 9%. Even the bond market suffered. Bonds often minimize risk and volatility, yet they offered little stability for investors in the first quarter of 2022. The Bloomberg U.S. Aggregate Bond Index lost more than 6% in the first quarter, the worst loss for the index since 1980.
The first-quarter decline in the bond market isn’t a new phenomenon. The Bloomberg U.S.Aggregate Bond Index has declined 10.6% since its peak in August 2020. That’s the worst correction in the U.S. Bond market in the past 25 years. It’s not just U.S. bonds, either. The Global Aggregate Index has declined 11%, falling to its lowest point since the 2008 financial crisis.
Why are bonds declining? There are several reasons. While all financial markets are facing headwinds right now, the bond market is facing multiple issues creating a perfect storm for income investors. The first issue is the ongoing war in Ukraine. Instability is always a risk for financial markets, and this is no exception. Investors are rattled by Ukraine’s uncertainty and the risk that the conflict could expand.
The other issue is the double-edged sword that is inflation and interest rates. In March, the Consumer Price Index (CPI) was up 8.5% from 12 months earlier. That’s the fastest annual rise in prices since 1981. The CPI has set new 40-year highs for five consecutive months. The sharp rise in inflation has led to a similarly rapid rise in interest rates. The Federal Reserve (Fed) raises interest rates to fight inflation. Higher interest rates make borrowing money more difficult, slows the economy and reduces demand for goods and services.
Fed Chairman Jerome Powell indicated a 50-point increase in interest rates at the May meeting. Other Fed officials have suggested that there will be further hikes. The CME Fed watch website predicts rates to hit 2-2.25% by the end of the year, with an 87% probability.
The prospect of increased interest rates has affected the stock market, but it’s also had a significant impact on the bond market. When interest rates rise, bond prices tend to fall. That means the bond market will continue to have challenges if the Fed continues to raise interest rates.
Fortunately, there are alternatives available. One potential alternative is a fixed indexed annuity (FIA), which could be used in a portfolio to replicate the income from bonds and protect the portfolio from volatility in the stock and bond markets. A fixed indexed annuity is a product offered by insurance companies. They are often tax-deferred, meaning you don’t pay taxes on gains as long as the assets stay inside the annuity. FIAs also provide risk protection because your value never declines due to market performance. You can potentially earn interest each year based on how market indexes perform, but you never lose any of your premium if the markets decline.
Many FIAs also offer optional riders, including income benefits that provide predictable lifelong income through retirement. Those benefits vary by product, but they can be used to replicate the income-driven nature of bonds. A fixed indexed annuity isn’t suitable for everyone, but it can be useful for those looking for predictable income and protection from market risk. Ms. Bevan advises that now may be the right time to review your strategy and explore alternatives to bond investments.
Shari Bevan is a highly experienced and qualified financial consultant who has helped 500 clients plan their estates. She deeply understands wealth management’s legal and tax implications, and her ChFC and CLU qualifications give her the expertise to help her clients protect and grow their assets. Ms.Bevan offers a comprehensive range of services, from estate planning to tax planning, to help her clients minimize their liability and maximize their wealth. With more than 20 years of experience in finance and law, she has the knowledge and skills to provide her clients with the best possible advice.
Bevan Wealth and Tax Strategies is a wealth management firm that provides comprehensive financial planning and investment management services to individuals, families, and businesses. They work with their clients to develop personalized strategies to help them achieve their financial goals. They offer comprehensive services to help their clients grow, protect, and preserve their wealth. The firm offers a holistic approach to wealth management from retirement and estate planning to investment management and tax strategies.
Investment advisory services offered through Change Path, LLC, an Investment Advisor. Bevan Wealth & Tax Strategies and Change Path, LLC are not affiliated.
Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No THE 2 SIDE STORY journalist was involved in the writing and production of this article.