The bond market has remained relatively profitable despite the market fluctuations witnessed in other investments. For instance, investors earned an average of 15.9% return on triple –B bonds higher than 14.2% and 14.4% on investment-grade bonds and high return depts, respectively (Rennison, 2020) . The bond investors have a dynamic approach that can minimize their risk, unlike other investment options. As a bond fund manager, one has to be familiar with the current bond market trends to reduce the risks and maximize returns on the millions of funds entrusted in the bond management fund. As noted by Fried (2019), the last two years have seen an unpredictable trend in the bonds returns with 2018 suffering from increased federal rates while 2019 enjoying improved prices due to lower interest rates. Thus one has to develop a bond market portfolio that is characterized by short term bonds, stable credit rating bonds, and diversification.
The maturity period of bonds is vital because of the changing interest rates. As observed from "Highest and Lowest Interest Rates, and Why They Changed" (2020), the federal interest rates have attained only two instances of a high of 2.25% since March 2008: Most of the period between 2008 and 2019 the interest rates have been near zero. With such a low federal interest rate, one is confident that the rate will, at some point, rise in adjustment to market forces. Though the time is not known, one should, therefore, maintain a low bond maturity duration of two to seven years to minimize the risk of losing the bonds' profitability due to an increase in the interest rates (Fried, 2019).
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Secondly, a bond fund manager should be conscious of the bond's credit index. Whenever a company faces financial difficulty, its bonds are likely to be derated. However, some bonds, such as bonds issued by the federal government, have less likelihood of experiencing a cut in their credit rating. Hence, one should prioritize such kind of bonds over the highly volatile sectors that are mostly hit by variations like inflation and interest rate adjustments (Fried, 2019).
Finally, the best bond portfolio is founded on diversification in the investment. Diversification minimizes the risk of losing the invested funds due to having a biased investment in one sector, yet it is affected by market forces. As such, in the event of changing market parameters such as inflation, derating of credit rating, and rise in interest rating, a diversified investment is likely to remain profitable since not all sectors are equally affected by changing market forces. For instance, discount stores such as Wall-mart thrive well during hard economic times. The evidence of discount stores store resilient performance is shown by the steady net income of Wall-mart. It experiences a net income in millions of $10267 in 2006, increased to $11, 231 in 2006, then 11284 in 2007 and 12731 in 2008 ("Walmart Net Income 2006-2019 | WMT", 2020). Yet, most industries net income dipped as an effect of the great depression.
In conclusion, a bond fund manager has no choice but to develop a bond portfolio that generates the best results for the millions of money they manage. As such, they minimize the risk by developing a bond market portfolio that consists of short term bonds, stable credit rating bonds, and diversification. Bonds with a short maturity period present less risk of experiencing less demand as a result of increased interest rates. Secondly, those that are likely to maintain their credit rating safeguard the invested sum of money, and finally, diversification reduces the risk of losing all the investment should one industry get hit by bad financial performance.
References
Highest and Lowest Interest Rates and Why They Changed. (2020). Retrieved 22 January 2020, from https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135
Rennison, J. (2020). Mountain of risky corporate debt poses ‘stability concern’. Financial Times . Retrieved from https://www.ft.com/content/45e537fc-321e-11ea-a329-0bcf87a328f2
Fried, C. (2019). After a Wild and Profitable Ride, Bonds Can Still Provide Safety. The New York Times . Retrieved from https://www.nytimes.com/2019/10/11/business/profitable-bonds-safety.html
Walmart Net Income 2006-2019 | WMT. (2020). Retrieved 22 January 2020, from https://www.macrotrends.net/stocks/charts/WMT/walmart/net-income
