Source: FactSet, three-year performance start dates: 8/31/84, 5/31/89, 2/28/95, 5/31/00, 6/30/06, 12/31/18. Agg is the Bloomberg Aggregate Bond Index. Corporates are represented by the Bloomberg US Corporate Investment Grade Index. Cash represented by the ICE BofA US 3M Treasury Bill Index. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index.
We then wanted to answer the question — “What is the cost of being late?” We looked at the same three-year periods and calculated the returns using cash for the first six months. For example, the corporate return is the average return for the six hiking cycles, staying in cash for six months following the last rate hike, and then invested in investment-grade corporate bonds for the subsequent 30 months. By waiting just six months, returns were down an average of 700 basis points (bps) over the three-year periods.
The Bloomberg U.S. Aggregate Bond Index is a broad-based benchmark that measures the Investment Grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid adjustable-rate mortgage pass-throughs), asset-backed securities, and commercial mortgage-backed securities.
The Bloomberg US Corporate Bond Investment Grade Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.
The ICE BofA 3-Month U.S. Treasury Bill Index is an unmanaged index that is comprised of a single U.S. Treasury issue with approximately three months to final maturity, purchased at the beginning of each month and held for one full month.
Incremental yield typically refers to a yield on an investment that is positive, as the word “incremental” indicates an additive value.
Risk-free rate of return is the theoretical rate of return that an investor would expect on an investment with zero risk.
Bond ratings are expressed as letters ranging from AAA, which is the highest grade, to C (“junk bonds”), which is the lowest grade. Different rating services use the same letter grades but use various combinations of upper- and lower-case letters to differentiate themselves. To illustrate the bond ratings and their meaning, we’ll use the Standard & Poor’s format: AAA and AA = high credit-quality investment grade; AA and BBB = medium credit-quality investment grade; BB, B, CCC, CC, C = low credit-quality (non-investment grade), or “junk bonds”; D = bonds in default for non-payment of principal and/or interest.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity. Interest income on these securities is exempt from state and local taxes.
Bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner, or that negative perception of the issuer's ability to make such payments may cause the price of that bond to decline. Investing in below-investment-grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. These securities can also be subject to greater price volatility.
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