7 bond market trends to watch in 2019

What can bond investors expect in 2019?

The S&P 500 index is on track for its worst year since 2008, and investors worried that things could go from bad to worse in 2019 are looking for ways to protect their portfolios. With interest rates on the rise, the relative safety of bonds is getting more appealing by the day for long-term investors. LPL Financial recently released its Outlook 2019 report, which includes an entire chapter on what investors can expect from the bond market next year. Here is a summary of LPL’s expectations for seven different classes of bonds in 2019.

U.S. Treasurys

LPL says U.S. interest rates will continue to rise at a moderate pace in 2019, making high-quality bonds more attractive for long-term investors. LPL says U.S. Treasury bonds are extremely sensitive to changes in the fed funds rate, and rising rates could negatively impact total returns. The Federal Reserve is projecting two additional 2019 rate hikes, and LPL is forecasting 10-year Treasury yields to peak between 3.25 and 3.75 percent in 2019. LPL says Treasurys can play an important role in providing diversification, income and liquidity during periods of extreme volatility in the stock market.

Municipal bonds

LPL says the 2017 tax cuts have hurt demand for municipal bonds, but munis performed better than the firm expected in 2018. Municipal bonds are a great way for investors to generate tax-free income, as all municipal bond interest payments are tax-exempt at the federal level. In addition, municipal bonds pay a premium yield to Treasury bonds, making them a relatively attractive option as long as investors stay diversified. Bond investors should remember that only municipal bond interest is tax-exempt, and any capital gains earned on their face value by selling prior to maturation is still subject to taxation. 

RELATED: Check out these crucial pieces of financial advice:

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13 pieces of money advice you can't afford to ignore
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13 pieces of money advice you can't afford to ignore

1. Pay yourself first

"People still don't grasp the fact that they need to save a dime out of every dollar," author and self-made millionaire David Bach told Business Insider in a Facebook Live interview. He said the average American who's saving money is saving just 15 minutes a day of their income, when they should be saving an hour.

Bach noted troubling research from the Federal Reserve that revealed nearly half of Americans wouldn't have enough money on hand to cover a $400 emergency. Yet, he continued, millions of those people will buy a coffee at Starbucks today and expect to buy the new $800 iPhone next year. Americans have money, he says, but we aren't saving it.

So get on the "pay-yourself-first plan," as Bach calls it, and automatically save an hour a day of your income. "When that money is moved before you can touch it, that's how real wealth is built," he said.

2. Beware of lifestyle creep

There's a lot of pressure in your 20s and 30s to keep up with your friends. Maybe they're buying a nicer car or a house, but if you're not in the financial position to keep up, don't try.

"I always refer to it as 'lifestyle creep' because one of the big things that people can do — that's an advantage to them — is keep their fixed expenses somewhat stable and reasonable for what they make," Katie Brewer, a Dallas-based certified financial planner who founded Your Richest Life, told Business Insider.

Planning for your recurring costs — like mortgage, rent, a car payment, and insurance — ensures that expenses won't creep up on you and derail your financial future. Of course, Brewer said, if you're making good money you should have the freedom to spend it how you wish, as long as your lifestyle doesn't overtake your income.

In short: Live below your means.

3. Take advantage of an employer-sponsored 401(k)

Putting money into a retirement plan as early as you can, no matter the amount, is a smart and easy way to pay yourself first.

If your company offers a 401(k) plan, take advantage of it. In some cases, employers will offer a contribution match. "That means the company contributes a set amount — say, 50 cents for a dollar — for every dollar you contribute up to a specified percentage of your salary," Beth Kobliner writes in her book "Get a Financial Life: Personal Finance In Your Twenties and Thirties."

"That's free money, equivalent to a 50% or 100% return. There's nowhere you can beat this!" she writes.

Plus, 401(k)s allow you to contribute your pre-tax money, meaning the more you contribute now, the greater the growth (thanks, compound interest) and the more money you'll have down the road, though you will be taxed when you withdraw the money for retirement. For 2017, the maximum contribution to a 401(k) is $18,000.

4. Invest in the stock market, just don't try to time it

"No one can time the market, so know that if there is a decline, it's going to bounce back. Over time, being in the market pays off more so than staying out of it," Michael Solari, a certified financial planner with Solari Financial Planning, told Business Insider.

A smart play, according to Solari, is to put your money in a low-cost target date retirement fund.

Sometimes known as "set it and forget it" investments, these diversified funds automatically adjust their asset allocation and risk exposure based on your age and retirement horizon. Early on, when the need for that money is still a couple decades away, the fund will adopt a more growth-focused strategy. As you ripen toward retirement, it dials back the risk.

You may not get the average annual return of 11% in your target date fund — given you'll be invested in a blend of stocks, bonds, and alternative assets — but if you get even 6% per year, an original $10,000 investment will be worth more than $32,000 in 20 years without you having to do a single thing. Compare that with $12,200 in your high-yield savings account or $10,020.20 in your traditional savings account.

kid put coin to piggy bank on the vintage wood background, a saving money for future education concept and copy space for input text.

5. Build an emergency fund

Let's face it: It's really not a matter of if you'll need to fork over cash for a car or home repair, child expense, or medical emergency, but a matter of when.

"No matter how well you plan or how positively you think, there are always things out of your control that can go wrong," Bach writes in his bestseller "The Automatic Millionaire."

"People lose their jobs, their health, their spouses. The economy can go sour, the stock market can drop, businesses can go bankrupt. Circumstances change. If there's anything you can count on, it's that life is filled with unexpected changes," he wrote.

Most financial planners suggest stockpiling anywhere from three to nine months worth of expenses in an emergency fund that you can turn to when in need. If you don't have savings at the ready, you run the risk of having to rely on family or friends for help, or worse, falling into debt.

6. Pay off your credit card balance in full every month

Sometimes a credit card can feel like free money, until you're slapped with the bill. Even then, most credit cards only require you to pay 1% to 3% of your balance each month, which can be an alluring prospect if your budget is tight. But consistently paying the minimum could cost you a fortune in the long run, damage your credit score, and affect your ability to qualify for a mortgage.

Farnoosh Torabi, a financial expert, author, and host of the "So Money" podcast learned this lesson the hard way.

Not only did she swipe her credit card with no reservations and adopt the bad habit of paying just the minimum amount — Torabi said she once forgot to pay the bill all together.

She remembered incurring a late fee that showed up on her credit report and gave her a true "wake-up call." The incident happened before she "realized the power of automating" her bills, a practice that can save you money on late fees and relinquish you from remembering due dates and the embarrassment of missing a payment.

7. Don't sit on too much savings

Saving money is important — and could be easier than it sounds — but if you're saving too much, you may be keeping yourself from building wealth.

Though you're "never going to kill your financial future" by accumulating money, Brewer says, "you're losing out on opportunity costs by having money sitting around ... especially if it's sitting in an account making barely anything in interest."

If you're risk-averse, one way to manage savings overflow is to move your money into a high-yield savings account, where you could be earning 1% interest on your money, rather than the 0.01% earned in a traditional savings account. Or, as previously mentioned, stick it in a low-cost target date fund and see your returns balloon over time, with little to no work required.

8. Have more than one credit card

It may seem financially reckless to have a wallet full of credit cards, but it's actually smart. According to John Ulzheimer, credit expert at CreditSesame.com, having a single credit card can damage your credit score, thanks to something called your credit utilization ratio — that is, how much of your available credit you're actually using.

"That percentage is very, very influential in your credit score," explains Ulzheimer. "People say that you're in good shape if you keep your utilization within 50% of your available credit, or 30%, but really, it should be below 10%."

Available credit counts all the cards you have: If you have one card with an $8,000 limit and one with a $6,000 limit, your total available credit is $14,000, even if you only spend $1,000 a month. With a single card, you have no unused credit cushioning the impact of your spending. The closer you get to your limit, the harder the hit on your credit score.

9. Pay off high-interest debt first

Sallie Krawcheck, a former Wall Street executive and the founder and CEO of Ellevest, says paying down high-interest debt should always be prioritized, even above building an emergency fund.

She explained the math in an article on Ellevest:

"Say you have $5,000 of credit card debt at an 18% interest rate. Say you happen upon $5,000 of money. If you take some of the advice out there, and split the use of that $5,000 (half to establish an emergency fund, half to pay down credit card debt), you still have $2,500 of credit card debt and $2,500 of money sitting in cash.

"The $2,500 of credit card debt at an 18% interest rate costs you $450 a year. The emergency fund earns almost nothing in interest. So you're out $450."

Bottom line: You'll save more paying off the debt than you'd earn if you invested it, whether in a high-yield savings account or the stock market.

10. Always be insured

Every American citizen is required to have health insurance, or be fined hundreds of dollars by the IRS each year. Kobliner advises signing up for insurance should be "your No. 1 financial priority" because it'll protect you from unforeseen accidents or illness, and prevent yourself or your family from going bankrupt in the case of an emergency.

If your employer offers health insurance, take it, Kobliner says. It's almost always cheaper than buying a policy on your own (but keep in mind that you can be covered by your parent's insurance until age 26). Before signing up, though, make sure you understand the cost and extent of the plan, including your deductible, or how much you'll be paying out-of-pocket before insurance takes over.

If you do end up needing to purchase a policy on your own, head over to healthcare.gov to compare plans and pricing.

11. Track your spending

Business Insider's Libby Kane has written, edited, and read hundreds, maybe thousands, of stories about money during her career, and says she's learned that "the best, most critical first step you can take to improve your finances is to track your spending."

Keeping tabs on where your money is going, whether fixed expenses like rent or mortgage payments and transportation costs or discretionary spending like dining out and travel, is a crucial part of mastering your money.

Setting up a spreadsheet or using a service like LearnVest or Mint can help you make cuts where necessary and even set you on a path to early retirement, if that's what you're after.

12. Pay your taxes — and be smart about it

"Whether you owe money to the tax man at the end of the year or not, it's always a smart move to file your taxes," Kobliner advises. 

And be aware that you can save money on taxes by taking advantage of deductions, or the specific expenses you're allowed to take out of your income before calculating your owed taxes. The standard deduction — $6,300 for singles and $12,600 for couples — is a good place to start, Kobliner says.

You can also itemize deductions to maximize your savings by listing specific deductions, including expenses for housing costs like mortgage interest or property taxes, and charitable donations, or making use of tax credits.

And if you don't file your taxes? You could pay a penalty fee of at least $135, plus interest on the money you owe, and lose ground on your credit report, among a host of other financial consequences.

13. Be patient

When bestselling author and motivational speaker Tony Robbins asked billionaire Warren Buffett a few years ago, "What made you the wealthiest man in the world?" Buffett replied, "Three things: Living in America for the great opportunities, having good genes so I lived a long time, and compound interest."

"The biggest thing about making money is time," the investor, who's now worth more than $76 billion, said in a recent HBO documentary about his life. "You don't have to be particularly smart, you just have to be patient."

In his latest letter to Berkshire Hathaway shareholders, Buffett announced that he was on his way to winning a $1 million bet he made in 2007 that his investment in an S&P 500 index fund would outperform five hedge funds over a decade.

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Mortgage-backed securities

The housing market has made a remarkable recovery since the downturn in 2008, and LPL says mortgage-backed securities have historically been extremely strong performers during periods of rising interest rates. Higher interest rates reduce prepayment risk for MBS investors, the risk associated with earlier-than-expected repayment of mortgage principal. LPL says mortgage supply in 2018 has been lower than anticipated, and a flattening yield curve has minimized MBS volatility. Even if the Federal Reserve slows the pace of its tightening in 2019, LPL says MBS provide an added dimension of diversification to a long-term portfolio.

Investment-grade corporate bonds

High-yield bonds have historically provided better returns than investment-grade bonds during periods of rising interest rates. However, LPL says investment-grade bonds are a safer way to get added credit exposure while also protecting your portfolio from the risks associated with lower-quality corporate debt. LPL says half of the U.S. corporate bond market now has a credit rating of BBB. These BBB-rated bonds are one notch above high-yield status and are somewhat of a middle ground for investors. As a result of the mass of BBB-rated bonds, LPL says investment-grade yields may be higher than their historical average in 2019.

High-yield corporate bonds

LPL says the high-yield bonds could continue to be supported by U.S. economic growth, but the potential for an economic slowdown has created meaningful risk in the high-yield market. According to LPL, a modest high-yield bond position is fine for diversification purposes, but the firm prefers a combination of investment-grade corporate bonds and high-quality stocks. The iShares iBoxx High Yield Corporate Bond ETF (ticker: HYG) outperformed the iShares iBoxx Investment Grade Corporate Bond ETF (LQD) throughout most of 2018, but the trend reversed in November, suggesting a potential shift toward higher-quality debt in 2019.

Bank loans

In the bank loan market, LPL says high issuance and softer investor protections are potential red flags for investors. Bank loans have historically been less volatile than high-yield bonds, but the bank loan market has also historically been less liquid. Like high-yield corporate bonds, bank loans can provide a level of diversification for investors, but the below investment-grade credit risk offsets much of the benefits bank loans provide in protecting against rising interest rates. LPL prefers bank loans to high-yield bonds in 2019 but says investors should limit their exposure to both markets in an uncertain environment.

International bonds

LPL says developed market sovereign bonds are overvalued, as central bank policies around the world have generally kept yields unattractive. Less accommodative central bank policies could create a difficult environment for bond investors in 2019. At the same time, LPL says emerging market debt currently has a relatively attractive valuation compared to its historical levels, and the firm is anticipating a rally in emerging market bonds over the next several quarters. A potential end to the international trade war could also be a bullish catalyst for emerging market bonds in 2019.

Copyright 2017 U.S. News & World Report

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