Bond Investment Strategies
Total Return Strategies Using Callable Securities
Many investors use callable securities within a total return strategy—with a focus on capital gains as well as income—as opposed to a buy and hold strategy focused on income and preservation of principal.
Callable securities are sometimes used by investors that have the view that yields will remain relatively stable, enabling the investor to capture the yield spread over non-callable securities of similar duration. Investors using callable securities also have views on the likely range of rates over the investment period and the market’s perception of future rate uncertainty at the horizon date for reasons explained in Risks of Investing in Callable Securities. If an investor has the view that rates may well be volatile in either direction over the near term but are likely to remain in a definable range over the next year, an investment in callable securities can enhance returns.
Premium callables may be chosen if a bullish investor believes that rates are unlikely to fall very far. Discount callables are sometimes chosen by investors who believe volatility will be low but prefer more protection in an environment of rising interest rates.