A generational opportunity in fixed income

After a decade of low yields, aggressive rate hikes have created significant opportunities across fixed income markets. We argue that elevated market volatility and interest-rate path uncertainty require a more dynamic, nimble approach. Below is an excerpt from our fixed income implementation guide for institutional investors for this new regime.

Putting current yields in perspective

The new market regime has unlocked investment opportunities in fixed income and credit not seen in over a decade. Investors today have an opportunity to re-size and re-think fixed income: re-sizing to cure any underweights relative to strategic asset allocations and rethinking the composition of fixed income allocations to take advantage of investment opportunities across the spectrum.

The long drought in broad sector yields is over, with 82% of Global Agg sectors yielding over 4%1. Though the aggressive hiking cycle has caused concerns for some market participants, we see silver linings:

  • Investors are now attractively compensated in high-quality assets at the very front end of the curve, easily securing >4% yields, incenting strategic tiering of liquidity pools to prudently put operating assets to work.
  • Core allocations benefit from both the higher rate environment as well as the potential for stronger hedging efficiency as sentiment around rates peaking grows or the Fed pivots in the event of a slowdown.
  • Gyrating markets and dispersion point towards opportunity for nimble investment strategies able to flex across geographies, sectors, and duration, while also benefitting private credit as traditional credit supply contracts.

Risk-efficiency of current yields

Highly-rated Investment-Grade credit and Treasuries yield approximately what poorly rated bonds did just one year ago. This means that the menu of investment options to reach a target yield has greatly expanded and investors can reach that target, without having to reach aggressively into higher risk product.

Building a 6.5% income portfolio takes less risk1

Building a 6.5% income portfolio takes less risk

Bonds’ ballast potential is back

Dissecting ‘why’ yields are higher is important - the Fed’s hiking activity has ‘raised all boats’. Spreads suggest fear of expected losses are not rising dramatically.

Bonds should once again offer hedge and diversifying potential in portfolios that have riskier allocations, given the considerable room for rates to rally in the event of a growth shock and/or if the Fed pivots and eases, as well as the yield cushion being a multiple of years prior.

Yield comparison highlighting impact of rises in risk-free rate1

Yield comparison highlighting impact of rises in risk-free rate