Fixed income markets may have changed, but the same lessons apply
After several years of ultra-low yields and highly accommodative stances by policymakers globally, fixed income has seen significant shifts across all sectors, paving the way for a new-look market environment.
With cash yields the highest in decades, investors have naturally gravitated towards short-term instruments such as money markets and certificates of deposit. However, for investors with a long-term horizon, reinvestment risk – the risk that future cash flows are invested at lower prevailing rates – means that today’s returns on cash cannot simply be extrapolated into the future. Finding strategic and diversified income sources can help minimize reinvestment risk and maximize risk-adjusted returns over a market cycle.
With that in mind, it is important investors do not forget the lessons of previous market cycles when considering fixed income portfolio allocations.
- Diversification remains essential for portfolios, and fixed income is an asset class that offers varied risks and opportunities across sectors.
- Previous market cycles have seen bonds rally following the end of interest rate hikes.
- Active management remains important for navigating volatile markets.
1. The power of private real assets, Nuveen Real Assets, 2022.
2. Source: Bloomberg LP. As of 30 Jun 2023. Representative indices: High yield corporates: Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index; Senior loans: Credit Suisse Leveraged Loan Index; Emerging market debt: Bloomberg Emerging Market Aggregate Index; Preferred securities: ICE BofA U.S. All Capital Securities Index; Investment grade corporates: Bloomberg U.S. Corporate Investment Grade Index.
3. Source: Bloomberg LP, Nuveen. Average of performance over the last four Fed tightening cycles. Agg Index is the Bloomberg U.S. Aggregate Index.
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A word on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments.
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