Investors are grappling with a number of market and economic challenges at present, including high inflation, geopolitical risks, banking sector worries, and heightened uncertainty over the path of monetary policy.
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 many years. 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.
Why Fixed Income?
With diverse sectors, fixed income markets offer solutions that can help support investors with a range of goals and risk tolerances. A key appeal of fixed income investing is that there are opportunities for defence and offence. The asset class is more fragmented than others. What drives one sector of the market is different than what drives another, so there’s often a wide dispersion among sector returns. This provides investors with the flexibility to find a sector and/or combination of sectors that can suit their particular needs—whether that’s generating consistent income, defence against equity market volatility, or, in some instances, capital appreciation.
Fixed Income Approaches in a Changing Market Climate
With diverse sectors, investors can find flexibility in bond markets
As of February 28, 2023.
For illustrative purposes only. This is not to be construed as investment advice or a recommendation to buy or sell any security. Investments involve risks, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market.
Source: T. Rowe Price analysis
Market Dynamics Demand Deep Research
Market dynamics have changed, and this may be unsettling for investors. But while the landscape is different, the need for fixed income as part of a diversified investment portfolio remains the same. Investors continue to seek ways to balance the need for both income and portfolio stability during these more uncertain times.
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