Synergy Capital Markets

Traditionally, advisors have used bonds as a primary building block of client investment portfolios.  The process generally works like this:  First, evaluate a client’s goals and risk tolerance; second, select a portfolio along the efficient frontier that is projected to deliver the required returns with the least amount of risk; third, select the actual investments that will act as proxies for the asset classes.

 

Advisors must construct portfolios that balance risk with returns.  This is usually done by blending higher volatility, higher return assets like equities with lower return, lower volatility assets, such as bonds and cash.  Historically, over long periods of time, cash maintains its purchasing power, but it offers little absolute return before taxes over inflation.  Long term and intermediate government bonds have historically produced about a 1.5% positive return over inflation, but intermediates have done so with significantly less volatility.  Under normal conditions, this would indicate that advisors should dampen portfolio volatility by reducing equity exposure and increasing intermediate bond exposure.

 

Times, however, are not always normal.  In a period of rising interest rates, even supposedly “safe” intermediate bonds can generate negative returns and especially, returns lower than inflation.  In fact, if you wanted to look at a really long period of time, the 1937 to 1981 time period provides an excellent example of what can happen to intermediate government bonds’ (five year maturities) total return during a period of rising interest rates and inflation.  

 

During this time period of somewhat moderate inflation, intermediates returned 3.6%, while inflation was 4.3% - a loss to inflation of 0.7% for 45 years.  Even in low inflationary periods such as the 1946 to 1965 period when inflation was 2.8%, yields on intermediate government bonds during that period rose from 1.03% to 4.90%, resulting in a total 2.2% compound return.  As a result, these bonds lost 0.6% per year for 20 years to inflation.  If that period is too long for you, from the beginning of 1955 through the end of 1959 (a period where intermediate governments produced negative total returns four out of five years), inflation was only 1.90%, while intermediate governments returned just 1.00%.  Yields on intermediate governments rose from 2.80% to 4.98% during that time period.  Today’s interest rates could increase that much in a similar period of time.  Speaking of negative total returns, as recently as 1994, intermediate governments had a negative total return of 5.1%.  In 1999 the loss was 1.8%.

 

Clearly, buying and holding intermediate term bonds is not an all-weather low risk strategy.  Long-term bonds (20 year maturities) in a rising interest rate environment naturally produce even worse results than those of intermediate return bonds.  During the 1937 to 1981 period, long-term governments produced total return losses in 15 of the 45 years.  With the recent onset of interest rate increases and a probable period of at least a few years of extended rate increases (assuming we don’t sink back into a recession any time soon), the use of alternative fixed income investments will be necessary to derive higher fixed income total returns than what intermediate bonds will provide in future years and avoid many potential short-term losses even if interest rates should rapidly increase within a short timeframe.

 

Synergy Capital Markets defines a fixed income alternative investment as a fixed income investment that does not react inversely to interest rate movements as traditional intermediate and long-term bonds do. 

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Synergy Capital Markets Fixed Income Real Estate Backed Ventures:

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• Target: 9% - 12% Annualized Return

• Alternative Short, Medium & Long-Term Investments

• Consistent Monthly Cash Flow

• Stable Net Asset Value (NAV)

• Not Correlated to the Stock or Bond Markets

• Little to No Sensitivity to Interest Rates

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All California Deed of Trust Investments are offered by Synergy Financial Partners, LLC (CFL 603K813 / NMLS 1269264)

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