KNOWLEDGE IS POWER. Fixed income investors, almost by definition, are a conservative group. Yet you would be hard pressed to find anyone who wouldn't prefer more income to less within a given risk category. Unfortunately, the vast majority of financial consultants, registered reps, and brokers (they're really the same thing) have neither the time nor the motivation to seek out fixed-income investments that are more advantageous to their clients than the typical "off the rack" bond.

With the bond market offering some of the lowest yields in recent history, it is natural that fixed-income investors are looking for ways to increase their yield and income. Most brokers will suggest that the only way to achieve this admirable goal is to accept lower credit quality - advice that could not be more inappropriate. Unfortunately, it is characteristic of the vast majority of investment "advice" today.

The first step to increasing the yield or income generated by your bond portfolio is to seek out a fixed-income specialist - an investment executive who spends the majority of his or her time in the fixed income markets and who can guide you through its sometimes unfamiliar and turbulent air. Knowledge is power. And it is these people who set themselves apart from the pack by actively scanning, researching and deciphering the various different types of securities in today's fixed income market.

A specialist understands the intricacies of the Municipal Bond market, the credit nuances in the Corporate Bond market, the benefits and risks of Convertible Bonds, the distinctions of the various tranches of Asset-Backed Securities and the appropriate uses of different types of Zero Coupon Bonds. Unfamiliarity breeds fear and fear leads you back to the familiar, effectively preventing the investor from taking the proper actions to increase the performance of a portfolio of fixed-income securities. Working with a fixed income specialist will reduce the unknown - thereby putting you on the right track towards a more productive fixed-income portfolio.

Asset Backed Securities
Easily the most confusing and difficult to understand area of the fixed-income world are asset-backed securities. The fixed-income specialist naturally knows that this is the place to go for some of the better values available. But, just as you wouldn't enter the jungle to hunt bear without a guide, you wouldn't just call your broker and ask for an Asset Backed Security. If you decide to enter the ABS jungle by yourself (or with an inexperienced guide), be prepared to encounter PACs, TACs, Sequentials, REMICs, Supports, Companions, IOs, POs, Zs, Floaters, Inverse Floaters and Super Floaters. Needless to say, bring your Bond Specialist.

High Yield
The municipal high-yield market can be both a dangerous and lucrative place for the high-yield investor. Like the traditional high-yield corporate bond market, the municipal high yield market offers a variety of large-issue, sub-investment-grade bonds that are widely followed by the traditional investment community. Unlike that market, the municipal high-yield market offers a plethora of small, non-rated bond issues that, when properly monitored, can offer investors an extraordinary yield and security advantage over traditional corporate high-yield bonds. Non-rated high yield securities may be subject to a higher risk of default due to their speculative nature

Again, knowledge is power. A thorough analysis of the particular bond's security and collateral features, redemption provisions and financial covenants is necessary prior to any recommendation being made as to the bond's value. But it can't stop there. An in-house monitoring and follow-up program must also be maintained in order to detect changes to the bond's creditworthiness. Nobody likes unpleasant surprises, and avoiding those is one of the major advantages of using a fixed-income specialist.

Convertible Bonds
Convertible Bonds, a hybrid security that combines features of both bonds and equities, can make an excellent addition to an investor's portfolio providing both current income and a chance to profit from an increase in the company's stock price. However, the many variables of the securities themselves coupled with the sometimes questionable credit quality of certain issuers makes it essential for an investor to work with a fixed income professional who understands the intricacies of the particular bond.

Convertible bonds are debt securities and as such, rank senior to all of the issuer's preferred and common equity. Generally, the convertible bond will be unsecured and rank subordinate to the company's senior and secured debt. It will also contain a provision allowing the holder to convert the bond into the company's common shares at a pre-set rate. These bonds are more subject to movement of the underlying common stock and therefore have additional risk factors.

For more information, contact our fixed income desk at fixedincomespecialities@siponline.com or call 845-496-8097.