Bond call considerations

AS the investment landscape changes, the recent increase in the benchmark interest rate by the Federal Reserve has presented fixed-income investors with both opportunities and challenges. Market noise has left many investors uncertain about what to do, where to invest, and how to position their portfolios to withstand the current volatility. Now imagine that, under these circumstances, you have been quietly and comfortably receiving steady income from a bond in your portfolio when you receive an advisory email stating that the bond has been called early. What does that mean? What should you do? In the words of Chicken Little, is the sky falling?

Callable bonds give issuers the right to repay a bond’s principal before its scheduled maturity date. When an issuer exercises this right, it effectively shortens the duration of the investment and, by extension, the investor’s income stream. However, if you are about to receive an early principal repayment the answer to the questions above may be more positive than you think. In a rising interest rate environment an early bond call can provide an opportunity to reposition your portfolio and potentially improve your future income.

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