Proxy Definition Finance
After the meltdown of financial markets that began in late 2007, the U.S. Treasury followed a low-interest rate policy to stimulate the economy. In this environment of ultra-low yields on the safest fixed-income investments, investors began to look to other higher-yielding investments. With little to no interest available on traditional safe havens such as bank accounts, savings bonds, or short-term U.S. Treasuries, investors who wanted to maintain their investment income felt compelled to take on more risk.
This added a new term to the financial lexicon: “bond proxies.”
The Meaning of "Bond Proxies"
So-called bond proxies are investment areas presumed to be enough to resemble bonds in terms of their ability to provide low-risk income, but with higher yields. Many financial advisors cautioned investors against this. Unfortunately, as investors learned in the second quarter of 2013, the financial advisors were right: bond proxies actually have quite a bit of short-term risk. The term "bond proxy" is a misnomer. A bond is a bond and there are no real substitutes.
The Lessons of a Down Market
In May 2013, investors were caught by surprise when U.S. Federal Reserve chairman Ben Bernanke suggested that the Fed may begin to taper its stimulative quantitative easing policy. The result was a sharp sell-off in the bond market, including the various types of higher-risk securities investors had purchased as bond proxies to boost their income.