Five charts to explain why fixed income deserves its place in a multi-asset portfolio

This piece uses five charts from the Guide to the Markets to explain why, despite an uncertain economic backdrop and recent volatility, we still see compelling opportunities across the fixed income landscape.

A combination of tariff related inflation concerns and expansionary fiscal policy across the developed world has kept bond market volatility high and led some investors to reexamine the risk reward in fixed income. However, taking a step back it is clear that the two key characteristics bonds have historically provided remain relevant and fixed income still deserves its place in multi-asset portfolios.

Investors have typically looked to bonds for two outcomes:

1. A steady stream of income.
2. Diversification against riskier assets if the growth outlook deteriorates.

In the decade following the global financial crisis the ability of bonds to offer either of these elements had steadily diminished. A long bull market compressed yields to record low levels, forcing investors to make an unenviable choice: accept paltry returns by investing in government bonds at ever lower yields, or chase higher yields in lower quality parts of the fixed income universe and take on much more risk as a result.

The bear market of 2022 was deeply painful for investors. As yields normalised, the global aggregate bond index fell by 16%, the worst annual decline since the index began in 1990. But the fixed income reset is now complete. Yields have established new trading ranges which they have remained in for the last two years and the role of bonds in a balanced portfolio has been restored.

Bonds once again offer an attractive income stream to investors and portfolios should be positioned to capture it. Higher starting yields should also give investors comfort that bonds are better positioned if risks materialise to either the up or downside. If tariffs reignite inflationary pressures, bonds have a greater cushion to absorb further upward pressure on yields before investors lose money over a 12-month period. However, if recession worries come to the fore yields have more room to fall than they did in 2020.