When I sat down in early February to reevaluate the piece, What’s Your Favorite Fixed Income Alternative, the 10-year treasury hovered near historic lows, by March, they had plunged further than many expected. March was the most volatile month we’ve seen since the Great Depression, not only in equities, but in bonds too. U.S. sovereign debt has traded at highest highs, with yields dropping to .318% on the 10-year and 1.34% on the 30-year*. Falling interest rates have resulted in gains for bond funds and bonds trading in the secondary market. With bonds trading at record highs, talk to your clients about potential bond alternatives for a few reasons.

If we do go through an inflationary period due to the increased level of debt offerings by the Federal Reserve, yields would increase, and the subsequent value of bonds would decrease in the secondary market. Changes in interest rates are one of the most significant factors affecting bond values in the secondary market. A truth of bond and bond fund investing is that when interest rates rise, secondary bond market prices fall.

Long term, this is not what bond investors have experienced. Since 1981, the U.S. has been in a bond bull market, where investors experienced consistent and predictable returns from yields and increase in prices of their long-term bonds. A strategy shift would be necessary during a low-interest rate environment.

Now let’s consider how your clients are using bonds. If they are using bonds to meet income needs in retirement, they could face a dilemma. If their expenses go up, they may be compelled to sell their existing bonds in the secondary market at a reduced price, in order to achieve higher a yield.

Alternatives to fixed income investments include, Multi-Year Guaranteed Annuities, Income Annuities, Structured Products, Registered Index Linked Annuities (RILAs), and an option we highlight in What’s your favorite fixed income alternative? Fixed index annuities (FIAs).

FIAs contractually contain the following benefits:

Principal Protection – If the market goes down during the crediting method period, the contract value remains steady and fully protected.

Guaranteed Lifetime Income – Lifetime income riders can be added to FIAs that can last a lifetime or two.

Market Participation – When the market goes up over the crediting method period, the contract value of a FIA increased based off cap rates, participation rates. This means forward contract growth during positive market years and not taking losses during negative years.

Tax Deferral – In an FIA, the client only pays taxes when income is taken out, and this allows the money to grow in deferral.

Fixed index annuities fit in as an alternative to fixed income today due to the way they are designed to maximize value through annual reset. In bear markets, they take no losses, but when markets rally and recover from market dips, their growth helps to outpace inflation and provide additional benefits over fixed income investments. Talk to your clients who want to maximize their fixed income portion of their portfolio about your new favorite fixed income alternative.

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*Franck, Thomas. “10-year Treasury yield hits new all-time low of 0.318% amid historic flight to bonds.” CNBC, March 8, 2020. https://www.cnbc.com/2020/03/09/10-year-treasury-yield-plunges.html.