Key points
- The pain of 2022 has reset bond yields to meaningfully higher levels that offer investors higher potential income and a margin of safety.
- With diverse sectors, fixed income markets offer solutions that can potentially help support investors with a range of goals and risk tolerances.
- For investors seeking diversification, absolute return bond strategies may help, while those with a higher risk tolerance and longer‑term horizon could find attractive opportunities in high yield corporate bonds at present.
With a new year underway, uncertainty remains high with investors grappling with a number of different issues, including high inflation, geopolitical risks, and central banks continuing to tighten even as economic growth slows.
These dynamics are challenging to navigate in portfolios, but the good news is fixed income has come a long way. The pain of 2022 has reset bond yields to their most attractive levels in more than a decade. That means for investors there's not only the potential to earn higher income from bond investing, but also a margin of safety to help protect investors should interest rates rise again.
A key pressure point for investors during 2022 was that the rise in bond yields coincided with stock markets selling off. This goes against the traditional tendency for fixed income to be a diversifying asset class that typically performs well when equity markets decline. Inflation has been the main driver of this, but that is showing signs of cooling. That together with a material slowdown in growth could help bonds potentially reassert themselves this year as a useful diversification tool for riskier assets. Also, with bond yields now at meaningfully higher levels, they simply have more room to rally should economic slowdown fears or a market shock put major selling pressure on risk assets.
This post was funded by T. Rowe Price
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1As of December 31, 2022.
