There are innumerable articles and editorials out there about the bond market, but it seems like most of them are expressing concern about higher yields and the impact on the retail investor. As a Portfolio Manager and a Traditionalist bond investor, I am quite happy with where the bond market is today. Traditionalists are very different from Retail bond investors; Thus, two bond markets!

For one thing, the drivers of inflation appear to be geopolitical – the conflict in the Straights of Hormuz. While the Iran conflict has gone on far longer than any of us hoped, it also appears to be temporary.

Also, as I said here last week, the United States and other first world countries have a spending problem. Rising rates make it harder for those countries to pay their bills, requiring the issuance of more bonds; greater supply leads to less demand, and eventually, the price of sovereign debt must be raised; which is inflationary!

For whatever reason interest rates have climbed, the greatest concern on the retail-investment side is that as yields rise, the price of existing bonds fall, and this is not good for standardized mutual fund and ETF returns. Most bond funds must maintain a level of liquidity that allows for shareholders to buy and sell easily and often. That means the funds cannot consistently hold bonds to maturity, increasing the volatility of returns. Historically, bonds were largely owned by insurance companies, pension funds, and banks in addition to individual investors. They weren’t traded frequently so prices were driven by credit fundamentals, interest expectations, and cash flow needs. Over the past two decades, however, management has been increasingly oursourced to funds, models, and target-date funds. This active trading creates a feedback loop that makes the funds the most influential “price-setters” for the bond market. This also explains why the diversification benefit of bonds has become less reliable over the last 10 to 15 years.

I have a different perspective. Traditionalists like myself want to hold bonds to maturity, delivering to the holder, a steady stream of interest payments based upon the face value of the bond, for the entire holding period; and a distribution of the face value upon maturity. In the form of a ten-year bond ladder, a client holds enough bonds to cover their income needs with the interest paid each year. The face value of bonds that mature in the current year, is then re-invested in the end of the ladder to maintain ten years of income.

While this may not seem very sexy, with Yield to Maturity at Cost becoming your only return on the bond portfolio, it provides a truly stable source of income and value that is reliable, even when the stock market is in crisis. Done correctly with the right size of portfolio, stocks need never be sold when they are down. Yes, the resulting market return on these bonds will go up and down just like the funds…but the strategy is to HOLD to maturity; and we know at the time of purchase, exactly what our return will be at maturity!

Insurers, pensions, and banks have known this all along. Higher yields make institutional pension obligations and the cost of annuity buyouts less expensive. Returns are positive while obligations are falling.

When seeking management to include a bond ladder, composite performance is important because an advisor’s composite should indicate how a particular strategy performed for all clients who used it. With composites, performance is aggregated across all similarly managed portfolios, showing that the performance is real, the strategy is repeatable, the manager is not cherry- picking the performance they show, and strategies can be compared.