Global bond yields have significantly recovered from their lows during the Covid-19. Nevertheless, AllianceBernstein (AB) contends that persistent secular forces will continue to present challenges when it comes to investing in fixed income.

The asset manager attributes these challenges to three macroeconomic headwinds. These include a diminishing working-age population, deglobalisation coupled with a peak in world trade, and a mounting debt burden redirecting productive investment.

“Collectively, these factors will likely yield lower growth and higher inflation, creating a challenging environment for investors. Add in historically high equity valuations and historically low Treasury yields, and you may have a return problem,” writes Brian Resnick, Director and Senior Investment Strategist for Fixed Income and Multi Asset at AB. 

Subsequently, Resnick highlights that the takeaway from 2022 is that the conventional method of portfolio diversification may not invariably prove effective. According to him, individuals investing in fixed income need to navigate an evolving investment landscape with caution.

“The key, in our view, is to design portfolios that deliver efficient income—the most income and total return potential for each added unit of risk taken on…investors should seek to minimise drawdown risk at any income level,” says AB. 

Additionally, the asset manager suggests a “barbell” approach that combines high-quality core bonds with globally diversified credit, aiming to achieve a balance between income generation and risk management. 

“Traditional core bonds continue to provide all-important high-quality interest-rate exposure but to help offset higher long-run inflation, more diversification is needed,” says Resnick

“Balancing core rate exposure with higher-yielding globally diversified credit in a barbell structure can generate income more efficiently, and introducing a private-credit dimension may further enhance the mix,” he adds. 

Furthermore, AB underscores that this strategy for investing in fixed income possesses the adaptability to capitalise on income opportunities across the entire credit cycle, wherever favourable prospects may arise. The asset manager also talks about the importance of adapting to market conditions and diversifying across industries to avoid concentration risk.

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