- Investment Director
United States, Institutional
Change
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Key points
- In my view, today’s fundamentally different economic era presents compelling opportunities for active fixed income investors.
- With the potential to capture attractive income at all points of the quality spectrum, I see a strong case for moving from cash into a diverse mix of short- and long-duration bonds.
- The consistent income offered by carefully selected credit investments can help to stabilise returns amid more frequent and shorter cycles, while an allocation to high-yield credit has the potential to provide meaningful returns as part of a well-diversified portfolio.
New era, new opportunities
Following the global financial crisis (GFC), bond yields declined for 15 years as central banks sought to avoid deflation taking hold. Markets may have come to accept low yields and limited market volatility as the norm, but I think this period of low inflation from 2008 to 2022 was an anomaly relative to history, as illustrated in Figure 1.
Figure 1
Research by our macro strategists suggests that inflation is likely to remain structurally higher and more volatile and economic cycles are likely to be shorter and more pronounced. The resulting investment backdrop may be more challenging, but it may also deliver new opportunities for active fixed income investors because, in my view, bonds have regained their historic role in portfolios — offering investors a stable source of income as well as the potential for downside protection and diversification:
- Building income
Central banks have started to embark on a cutting cycle, but I expect policy rates to remain at levels where bond yields will remain attractive. The income from bonds isn’t just attractive outright. Historically, it keeps up with cash. If short-term rates drop quickly, cash investors would need to reinvest at lower, less attractive rates. By moving out of cash and into fixed income, investors can lock in higher yields and avoid having to reinvest in a lower-rate environment.
Discover more about the income potential of investing in bonds: Diving into the new world of credit - Allocating for growth
For investors seeking income without giving up on returns from their fixed income allocation, investing in high-yield bonds can complement an income-focused approach. High yield provides greater exposure to the economic cycle and has the potential to offer comparable returns to equities — but has historically delivered better downside protection. Equally, falling interest rates amid an economic slowdown typically lead to capital appreciation in longer-duration bonds, so investors should consider moving some cash into longer- as well as shorter-duration bonds.
Discover more about the growth potential of fixed income: Opportunities in high yield: ready, steady, pounce? - Enhancing diversification
Over the last decade, an estimated US$20 trillion of liquidity has been pumped into global markets. As policymakers withdraw that liquidity, market volatility is likely to pick up. Reduced liquidity and shorter cycles demand a more nuanced and active approach to diversification, and bonds can play a key role across the spectrum — whether in core credit and high yield, developed and emerging markets, or unconstrained as well as benchmark-focused strategies.
Discover more about the diversification potential of fixed income: Destination diversification — is your bond portfolio ready to take flight?
Bottom line
In my view, today’s new economic era underlines the strategic case for fixed income and brings with it a wide range of investment opportunities for active, research-driven strategies.
