Common misconceptions about bond investing

Fundamental misconceptions about bond investing are common, according to new BlackRock research. Jeff shares three.

Intuitive isn’t a word that’s typically used to describe fixed income markets. It’s no surprise, then, that misconceptions about bond investing are common, according to a new BlackRock survey of 417 Americans with $50,000 or more in investible assets.

The survey, conducted from April 21 to 23, aimed to capture Americans’ understanding of fixed income investing. The main finding: Misunderstandings abound about bond basics and the role fixed income plays in a portfolio. Many investors seem aware of their knowledge deficit when it comes to fixed income fundamentals: Sixty percent of those surveyed said they don’t consider themselves knowledgeable regarding fixed income, and just 43% said they understand the market and economic forces that drive bond prices. Here’s a quick look at a few of the most common knowledge gaps, according to the new BlackRock research.

Misconception: Rising rates don’t negatively affect fixed income investments.

After years of declining and relatively low interest rates, the prospect of rising rates represents a sea change for investing, yet many Americans appear not to understand what this change could mean for investing strategies, according to the survey results.

Only about three in 10 (31%) of those surveyed correctly noted that if interest rates rise, the effect on the fixed income investments that investors already own is negative (when interest rates rise, bond prices fall). But more than twice as many (68%) got the link between rates and prices wrong: Thirty-five percent of those surveyed said there is a positive effect on current fixed income investments when rates rise, while 33% said rising rates make no difference for fixed income investments.

BlackRock’s view is that interest rates will rise from historic lows in coming months and years, making an already complex fixed income investing environment even more so, and investors need to be aware of the risk that rising rates pose to portfolios. Rising rates have the potential to touch all segments of the markets, not just fixed income, so it’s key for investors to seek out information so that they can fill any knowledge gaps regarding this critical trend.

Misconception: Fixed income investing is risk free.

Nearly one third (31%) of those surveyed said they strongly, or somewhat, agree with the statement that “with fixed income investments, you can’t lose your money.”

Misconception: Investing in one’s own country is enough for diversifying bond portfolios today.

Those surveyed appeared hesitant to consider investing beyond their borders, displaying a strong home bias. Sixty-nine percent said they would be more comfortable investing in bonds from the U.S. than from foreign countries. Investors, however, now generally need to consider investing beyond their borders as well as at home in order to achieve proper diversification. One reason: Global fixed income markets are becoming increasingly interdependent, as I write in my new Fixed Income Strategy piece Reevaluating reflation.

The U.S. has often led moves in global bond yields, such as during the “taper tantrum” of 2013 when then Federal Reserve Chairman Ben Bernanke sparked a global bond market rout by signaling the beginning of the end of quantitative easing. Yet the causality sometimes runs the other way, with global developments leading the U.S. Ultra loose monetary policies in Japan and the eurozone have exerted a gravitational pull on yields worldwide. And U.S. Treasury yields followed German bund yields lower in the period around the 2016 Brexit vote, with a similar pattern playing out in the run-up to the recent French presidential election.

Overall, the correlation between major bond markets has risen sharply, with the marketplace changing and becoming more interconnected globally. Against this backdrop, fixed income investors need to stay flexible and carefully consider the entire range of appropriate investing options, including opportunities abroad. Read more market insights in my monthly commentary on fixed income markets.

Jeffrey Rosenberg, Managing Director, is BlackRock’s Chief Investment Strategist for Fixed Income, and a regular contributor to The Blog.

Learn more about how consistent investment performance and low fees are critical to achieving your fixed income goals in today’s environment.

Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

Investing involves risks including possible loss of principal. Bond values fluctuate in price so the value of your investment can go down depending on market conditions. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2017 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

RO-163152

Join the Conversation

Do you know what drives fixed income markets? Do you know what drives fixed income markets? Join in >