The Fed and Fixed Income

For much of the past three years our fixed income asset allocation has remained unchanged; i.e. 90% Investment Grade Debt/10% High Yield Debt. With year-end portfolio rebalancing we are changing the fixed income allocation; i.e. 85% Investment Grade Debt/15% High Yield Debt.

The core of the Fixed Income allocation remains committed to the objectives of current income and capital preservation. In non-taxable and low tax bracket accounts we are emphasizing corporate bonds with secondary consideration given to government bonds and CDs. In high tax bracket investor portfolios we continue to buy municipal bonds. The accompanying chart highlights that the core fixed income asset classes are the most consistent and least volatile.

High yields have more credit risk and are more volatile than the core asset classes. Because of deteriorating economic and credit conditions during the bear market, the price of high yield securities dropped significantly and yields rose dramatically. Yield spreads between high yields and investment grades entering the 3^rd quarter of 2002 reached historically wide levels; e.g. 8-9%.

It is our opinion that as we experience improving economic and credit conditions high yield securities may experience price appreciation. On anticipation of improving conditions, high yields have appreciated since mid October. The appreciation and high current dividend yields can provide an attractive total return relative to the core fixed income portfolio.


J a n u a r y 2 0 0 3

The Fed and Fixed Income For much of the past three years our fixed income asset allocation has remained unchanged; i.e. 90% Investment Grade Debt/10% High Yield Debt. With year-end portfolio rebalancing we are changing the fixed income allocation; i.e. 85% Investment Grade Debt/15% High Yield Debt. The core of the Fixed Income allocation remains committed to the objectives of current income and capital preservation. In non-taxable and low tax bracket accounts we are emphasizing corporate bonds with secondary consideration given to government bonds and CDs. In high tax bracket investor portfolios we continue to buy municipal bonds. The accompanying chart highlights that the core fixed income asset classes are the most consistent and least volatile. High yields have more credit risk and are more volatile than the core asset classes. Because of deteriorating economic and credit conditions during the bear market, the price of high yield securities dropped significantly and yields rose dramatically. Yield spreads between high yields and investment grades entering the 3^rd quarter of 2002 reached historically wide levels; e.g. 8-9%. It is our opinion that as we experience improving economic and credit conditions high yield securities may experience price appreciation. On anticipation of improving conditions, high yields have appreciated since mid October. The appreciation and high current dividend yields can provide an attractive total return relative to the core fixed income portfolio.



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