Bond navigators: Time to lock in income

For a long time after the Great Financial Crisis, fixed income investors faced a difficult challenge: bonds still offered diversification benefits, but the income they generated was often modest. With interest rates anchored near zero, many investors were forced to look elsewhere for yield, often taking on greater risk in the process.

Today, that picture looks very different.

Investors can now access yields that were largely unavailable for more than a decade.

Higher interest rates have restored income as a meaningful component of fixed income returns, allowing bonds to once again fulfil a more balanced role within portfolios. Investors can now access yields that were largely unavailable for more than a decade, creating an opportunity to lock in attractive levels of income while maintaining the defensive and diversification characteristics that have traditionally made fixed income a core portfolio allocation.

The return of income

The return of income matters because it changes the way investors can think about fixed income. In recent years, bond returns have often been heavily dependent on movements in interest rates and capital values. Today, a larger proportion of expected returns can come from the income generated by the underlying securities themselves. That income can provide a valuable cushion against market volatility and reduce reliance on favourable market timing or falling yields to achieve investment objectives.

In our view, this makes active management more important, not less. Credit markets remain inefficient: benchmarks are rule-based and can often be skewed towards the most indebted issuers; and ratings tend to focus more on default probability than recovery value.

In our view therefore, higher yields do not remove the need for selectivity. In fact, they increase the value of understanding where that yield is coming from.

Not all income is created equal

One of the most important lessons from credit markets is that not all yield is created equal. This is where both opportunity and challenges are presented. Attractive yields are available across a much broader range of fixed income sectors than was the case during the ultra-low-rate era.

The more important question is whether investors are being adequately compensated for the underlying risks.

We do not believe investors should simply reach for the highest headline yield. The more important question is whether investors are being adequately compensated for the underlying risks, including credit quality and security.

Higher borrowing costs, uneven economic growth and continued uncertainty mean that some businesses will prove more resilient than others. As a result, security selection has become a critical driver of outcomes.

Which, again, highlights that for active investors, this environment can be particularly attractive. The return of income does not remove the need for discipline; if anything, it makes discipline more important.

A stronger role for fixed income

Importantly, locking in income today is not simply a short-term tactical decision. Several structural factors suggest that income is likely to remain a more important component of fixed income returns than it was during the decade following the financial crisis. Even if policy rates move lower over time, the era of near-zero interest rates is unlikely to return quickly. As a result, fixed income could continue to offer a more compelling combination of income generation, diversification and capital preservation than investors have experienced for many years.

For investors, the message is straightforward: bonds are once again capable of delivering meaningful income. Yet the opportunity is not simply about buying the highest-yielding assets available, it is about identifying durable sources of income, understanding the risks behind the yield and building portfolios that are resilient across a range of economic outcomes. As global economic uncertainty remains elevated, locking in attractive levels of income from carefully selected fixed income investments could prove one of the most compelling opportunities available to long-term investors.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.