Why it’s time to re-examine your fixed income allocation

June 06, 2022

With high yield bonds now offering yields in excess of 7% and investment-grade debt having income to fix, bond allocations need to be viewed with a new mindset.

Over the last few years, fixed income allocations pulled below strategic weight for many allocators as equity markets kept rising and accommodative monetary policy pushed yields lower and duration longer. Attractive fixed income yields were becoming scarcer and fears around what would happen if rates normalised meant risks in the space were elevated.

Cut to 2022 when central banks began guidance to raise rates and followed through with action, bond markets sold off aggressively. Clients responded by reducing duration, moved in favour of floating-rate from fixed-rate securities and in some cases, moved entirely to cash and cash-plus strategies.

Fast forward to today and for the first time in years, high yield bonds are offering high yields (some 7.7%) and investment grade fixed income has income to fix (3.9%). That said, investors are still understandably on the fence as to whether to re-engage with the asset class.

While macro risks remain elevated, a new challenge has entered the fray – not owning enough duration against your strategic allocation.

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“While the beta of the fixed income asset classes is increasingly looking more compelling, the alpha potential hasn’t been higher for some time.”

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