While resilient economic data and shifting interest rate expectations have weighed on recent performance, history suggests that bonds have a long runway for strong performance as the Fed continues to normalize policy.
There are attractive entry points across the fixed income spectrum
All-in yields across fixed income are strong from a historical perspective, with yields in almost every sector above their 10-year median. For bond investors, this means that there are a series of attractive entry points regardless of the desired investment outcome. That said, each fixed income sector will have its own challenges and opportunities, underscoring the need for active management in the asset class.
The risk/reward profile in fixed income is skewed to the upside
With interest rates near multi-decade highs, investors are enjoying a “coupon cushion” in their portfolios, making them less sensitive to further increases in rates. Moreover, with rates set to move lower from here, the risk/reward profile in bonds is skewed to the upside. Looking forward, with interest rates not expected to fall to zero, investors can count on continued income even once rates are normalized.
While bond returns have been muted since the last hike, this will likely change
Generally, Fed rate cutting cycles have resulted in strong performance from fixed income. While resilient economic data and shifting interest rate expectations have weighed on recent performance, history suggests that bonds have a long runway for strong performance as the Fed continues to normalize policy.