Preview
Bond yields are higher than they’ve been in nearly 15 years, presenting investors with a variety of opportunities regarding fixed-income. The economic backdrop has also improved recently and is poised to be favorable in 2024 given falling inflation trends and subsequent likely rate cuts from the Fed.
What’s more, the breakdown of the traditional 60/40 (equities/bonds) portfolio that occurred over the last year or so—the historical negative correlations between stocks and bonds that help investors diversify—has largely been restored. Bonds once again can serve as a valuable hedge to equities and other risk assets. This is especially important as they offer compelling income in both nominal and real terms, which is well above recent equity yields (S&P dividend yield of 1.4%, as of year-end 2023). In other words, one of the most important qualities of fixed-income—the diversification benefit—appears to be functioning again. Finally, we believe current yields may be a reasonable indicator of what investors can earn over time.
Key takeaways:
- Given where we are now (i.e., post- Covid, falling inflation, higher rates, restoration of bonds’ diversification benefits), we believe that the case for fixed-income is very strong.
- Although cash rates are currently attractive, investment-grade credit yields are currently offering outperformance.
- Government bond yields are modestly lower than cash rates but look cheap in real terms (30-year Treasuries currently offer 2% real yields), and if yields fall Treasury yields should outperform cash significantly.
- Fixed-income has earned its place in investor portfolios due to its long track record—over a century—of providing ballast due to its historically negative correlation to equities.
- Today’s higher rates and opportunity for enhanced yield across a variety of fixed-income sectors underscores the appeal of the asset class.
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WHAT ARE THE RISKS?
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.