Unsubscribe

Confirm you would like to unsubscribe from this list

Don't save
Cancel

Remove strategy

Confirm you would like to remove this strategy from your list

Welcome to Thornburg

Please select your location and role to help personalize the site.
Please review our Terms & Conditions

For Institutional / Wholesale / Professional Clients

The content on this website is intended for institutional and professional investors in the United States only and is not suitable for individual investors or non-U.S. entities. Institutional and professional investors include pension funds, investment companies registered under the Investment Company Act of 1940, financial intermediaries, consultants, endowments and foundations, and investment advisors registered under the Investment Advisors Act of 1940.

TERMS AND CONDITIONS OF USE

Please read the information below. By accessing this web site of Thornburg Investment Management, Inc. ("Thornburg" or "we"), you acknowledge that you understand and accept the following terms and conditions of use.

Disclaimers

Products or services mentioned on this site are subject to legal and regulatory requirements in applicable jurisdictions and may not be licensed or available in all jurisdictions and there may be restrictions or limitations to whom this information may be made available. Unless otherwise indicated, no regulator or government authority has reviewed the information or the merits of the products and services referenced herein. Past performance is not a reliable indicator of future performance. Investments carry risks, including possible loss of principal.

Reference to a fund or security anywhere on this website is not a recommendation to buy, sell or hold that or any other security. The information is not a complete analysis of every material fact concerning any market, industry, or investment, nor is it intended to predict the performance of any investment or market.

All opinions and estimates included on this website constitute judgements of Thornburg as at the date of this website and are subject to change without notice.

All information and contents of this website are furnished "as is." Data has been obtained from sources considered reliable, but Thornburg makes no representation as to the completeness or accuracy of such information and has no obligation to provide updates or changes. Thornburg disclaims, to the fullest extent of the law, any implied or express warranty of any kind, including without limitation the implied warranties of merchantability, fitness for a particular purpose and non-infringement.

If you live in a state that does not allow disclaimers of implied warranties, our disclaimer may not apply to you.

Although Thornburg intends the information contained in this website to be accurate and reliable, errors sometimes occur. Thornburg does not warrant that the information to be free of errors, that the functions contained in the site will be uninterrupted, that defects will be corrected or that the site and servers are free from viruses or other harmful components. You agree that you are responsible for the means you use to access this website and understand that your hardware, software, the Internet, your Internet service provider, and other third parties involved in connecting you to our website may not perform as intended or desired. We also disclaim responsibility for damages third parties may cause to you through the use of this website, whether intentional or unintentional. For example, you understand that hackers could breach our security procedures, and that we will not be responsible for any related damages.

Thornburg Investment Management, Inc. is regulated by the U.S. Securities and Exchange under U.S. laws which may differ materially from laws in other jurisdictions.

Online Privacy and Cookie Policy

Please review our Online Privacy and Cookie Policy, which is hereby incorporated by reference as part of these terms and conditions.

Third Party Content

Certain website's content has been obtained from sources that Thornburg believes to be reliable as of the date presented but Thornburg cannot guarantee the accuracy, timeliness, completeness, or suitability for use of such content. The content does not take into account individual investor's circumstances, objectives or needs. The content is not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services, nor does it constitute investment advice and should not be used as the basis for any investment decision.

Suitability

No determination has been made regarding the suitability of any securities, financial instruments or strategies for any investor. The website's content is provided on the basis and subject to the explanations, caveats and warnings set out in this notice and elsewhere herein. The website's content does not purport to provide any legal, tax or accounting advice. Any discussion of risk management is intended to describe Thornburg's efforts to monitor and manage risk but does not imply low risk.

Limited License and Restrictions on Use

Except as otherwise stated in these terms of use or as expressly authorized by Thornburg in writing, you may not:

  • Modify, copy, distribute, transmit, post, display, perform, reproduce, publish, broadcast, license, create derivative works from, transfer, sell, or exploit any reports, data, information, content, software, RSS and podcast feeds, products, services, or other materials (collectively, "Materials") on, generated by or obtained from this website, whether through links or otherwise;
  • Redeliver any page, text, image or Materials on this website using "framing" or other technology;
  • Engage in any conduct that could damage, disable, or overburden (i) this website, (ii) any Materials or services provided through this website, or (iii) any systems, networks, servers, or accounts related to this website, including without limitation, using devices or software that provide repeated automated access to this website, other than those made generally available by Thornburg;
  • Probe, scan, or test the vulnerability of any Materials, services, systems, networks, servers, or accounts related to this website or attempt to gain unauthorized access to Materials, services, systems, networks, servers, or accounts connected or associated with this website through hacking, password or data mining, or any other means of circumventing any access-limiting, user authentication or security device of any Materials, services, systems, networks, servers, or accounts related to this website; or
  • Modify, copy, obscure, remove or display the Thornburg name, logo, trademarks, notices or images without Thornburg's express written permission. To obtain such permission, you may e-mail us at info@thornburg.com.

Severability, Governing Law

Failure by Thornburg to enforce any provision(s) of these terms and conditions shall not be construed as a waiver of any provision or right. This website is controlled and operated by Thornburg from its offices in Santa Fe, New Mexico. The laws of the State of New Mexico govern these terms and conditions. If you take legal action relating to these terms and conditions, you agree to file such action only in state or federal court in New Mexico and you consent and submit to the personal jurisdiction of those courts for the purposes of litigating any such action.

Termination

You acknowledge and agree that Thornburg may restrict, suspend or terminate these terms and conditions or your access to, and use, of the all or any part this website, including any links to third-party sites, at any time, with or without cause, including but not limited to any breach of these terms and conditions, in Thornburg's absolute discretion and without prior notice or liability.

Decline
Give Us a Call

Fund Operations
800.847.0200

FIND ANOTHER CONTACT
One hundred dollar bill with a crown on Ben Franklin's head.
Fixed Income

Is Cash Really King? Why Bonds Should Reign

Rob Costello, CFA
Client Portfolio Manager
1 Sep 2023
5 min read

While cash yields are certainly attractive today, fixed income assets have historically outperformed cash when the Fed stopped raising rates.

In the world of investing, fixed income has traditionally been associated with stability and income generation. This role has been uniquely challenged since the spring of 2022, when the Federal Reserve embarked on a series of massive rate hikes – at one point, four 75 basis points hikes in a row – which the markets have not experienced in a generation. Not surprisingly, many fixed income strategies and indices posted the worst total returns in their history, but the silver lining to rate hikes has been the return of higher yields in short-dated instruments such as Treasury bills. Naturally, many investors flocked to the front-end of the curve, taking advantage of these elevated yields, but in this article we argue that now is an opportune time to reallocate some of this cash into the fixed income space. Specifically, we will discuss the valuable role of the so-called “pull to par” in how returns will be generated going forward and how deploying cash into fixed income near or at the end of Fed tightening cycles has historically led to better outcomes for investors.

Money Market Fund Assets Surged to Record Highs with the Fed’s Tightening Cycle

Source: Bloomberg

Cash Went from Trash to Treasure

Let’s begin by discussing the current interest rate environment, specifically the implications of the Fed’s hiking cycle. The Fed and other central banks have used their policy rates as tools to bring exceedingly elevated levels of inflation back towards what they deem to be “normal” or within their respective target ranges. While this has caused some anxiety among investors, particularly in risky asset markets, it has also led to attractive yield generation in short-term instruments like Treasury bills, money market funds, and certificates of deposit (CDs). As of July 31, 2023, the 6-month Treasury bill yielded 5.46%, the highest level in 23 years. As yields have risen, the money has followed, with prime and taxable money market funds taking in a combined $744 billion in flows for the 1-year period ending July 31, 2023, per Morningstar. Contrast this to the taxable bond space, which has experienced a net outflow of $85 billion over the same period.

Rising rates also have the effect of increasing the coupons paid on new fixed income securities, which should support forward looking returns. But perhaps more importantly, the rate sell-off has decreased the dollar price of bonds already in existence, many of which are government or investment-grade corporate bonds with low credit risk. As a result, the bond market is priced at a discount even though fixed income securities, with the exception of a default event, mature at “par” or $100. It is this “pull to par” that should drive attractive returns and ultimately better economic outcomes than even the seemingly attractive yields provided by cash instruments today.

Don’t Forget Fixed Income’s “Pull to Par” Effect

The term “pull-to-par” refers to the tendency of fixed income securities to move towards their face value (par value, or $100) as they approach maturity. Bonds priced at a discount will see their prices rise as they get closer to maturity, while bonds trading at a premium (that is, above $100) will see their values fall to par over time. In today’s environment, with the Fed near or at the end of the tightening cycle (as of this writing), fixed income securities with prices below their par value have potential for meaningful price appreciation. That appreciation, in addition to regular coupon payments, leads to larger total returns for investors. We believe this total return likely eclipses the yields that may be earned on short-end instruments.

To illustrate how unique the current fixed income environment is, let’s examine historical price data for various fixed income indices over the last 10 years. In the chart below, we show average price for the Bloomberg U.S. Universal Index. For the vast majority of the 10-year period, average price for the index was either near or above par, with the mean dollar price at about $102. Rising rates have driven the average dollar prices of the index, and active portfolios as well, down to near unprecedented levels, currently below $90. Given the quality of the constituents of the index, it is reasonable for an investor to believe that these bonds will pull back to par as they get closer to maturity, thereby providing investors with an additional boost to performance over and above just clipping coupon payments.

Today’s Rate Environment Leaves Fixed Income Indices Priced at a Discount

Source: Bloomberg

The End of the Fed Hiking Cycle: A Buy Signal?

Another lens to look at the relative value of owning fixed income versus cash instruments can be seen in historical data on how both have performed in an environment similar to the present one, that is, with the Fed near or at the end of its hiking cycle. We looked at data for the last four Fed tightening cycles going back to the mid-1990s to see how both cash and fixed income performed as the cycles ended. We used the ICE BofA U.S. Treasury Bill Index as a proxy for short-term instruments and selected four Bloomberg indices representing both above and below investment-grade securities for fixed income. As the table shows, the subsequent one- and two-year returns produced, in most cases, better economic outcomes when owning fixed income as opposed to staying invested in Treasury bills. In the current environment where the Fed is at or near the end of its tightening cycle, and with an elevated chance of economic weakness going into 2024, fixed income has a similar potential to outperform cash instruments this time around.

History Shows Better Outcomes with Fixed Income, Instead of Cash, When the Tightening Cycle Ends

Source: Bloomberg

Conclusion

By combining both the return generators of coupon and the “pull-to-par” effect, investors may outperform Treasury bills, CDs, and money market funds in the months and years ahead. We believe active management remains a valuable tool to capture these excess returns and potentially add alpha over benchmark indices. Many fixed income securities with attractive risk and reward characteristics, such as short-dated, investment-grade rated bonds within the asset-backed securities and residential mortgage space, sit outside of benchmarks and represent some of today’s most compelling opportunities.

The concept of earning coupon plus the pull-to-par represents a valuable opportunity for fixed income investors moving forward. By understanding how this phenomenon impacts fixed income securities’ total return, investors can capitalize on the current opportunity it presents. When combined with effective active management strategies, the pull-to-par effect may serve as a powerful tool to achieve outperformance and enhance overall returns. But timing is of the essence. The economy will eventually weaken, and perhaps tip into recession. Yields today look to be interesting even in a high-quality portfolio. So now is the time to make those moves, not to wait until yields fall.

Discover more about:

Stay Connected

Subscribe now to stay up-to-date with Thornburg’s news and insights.
Subscribe

More Insights

Racers at the finish line on a track
Global Equity

Forget the Magnificent 7 – Why You Should Invest in Europe’s Fantastic 5

Europe has its own crop of market-beating growth stocks that are overlooked compared to the Magnificent Seven in the US.
Choosing between an older advisor and a younger advisor.
Investor Advice

Should You Opt for an Older or Younger Financial Adviser?

Do you want the wisdom that comes with age or the innovation that comes with youth? Maybe you can have both with an advisory team.
Markets & Economy

Observations: The Value of Dividends and Munis to Stoke Income

Our Co-Heads of Investments make the case for dividend-paying stocks and the tax-free feature of Munis as tax hikes are possible, given our government debt levels.
Markets & Economy

Observations: Market Concentration and the Fed’s Policy Outlook

Our Co-Heads of Investments discuss whether the equity market rally is finally broadening and whether the Fed's forecast for three rate cuts makes sense.
Markets & Economy

Observations: Are Investors Too Complacent?

Our Co-Heads of Investments discuss whether the financial markets' substantial gains following last autumn's 'Fed pivot' left investors smug amid potential dangers.
Woman with her smart phone and plexus connection
Global Equity

Avoiding Concentration Risk in AI: Is It Time for a Reality Check?

Overexuberance for all things AI can create concentration risk. See how we’re curating diversified exposure designed to perform over the long term.

Our insights. Your inbox.

Sign up to receive timely market commentary and perspectives from our financial experts delivered to your inbox weekly.