The role of fixed-income investing in changing times

The ultra-accommodative monetary policies of central banks over the past decade led to a significant decline in bond yields. However, Capital Group informs that things have reversed, and banks are moving towards policy normalisation. The asset manager believes that this new regime will continue and highlights the importance of fixed-income investing in these changing times.

“In this environment, the defensive attributes of conventional fixed-income mean the asset class is potentially well placed to meet investors’ defensive needs,” affirms Capital Group. It informs that bonds help in capital preservation, diversification, and income generation in a defensive investor’s portfolio.

Emphasising the capital preservation role of bonds, Capital Group explains that a rise in bond yields since 2022 implies that investors can now hold higher-quality credits. This also enhances the defensive qualities of their bond allocation, as per the asset manager. “It is important, however, to not simply rely on the underlying credit rating, but to undertake in-depth research to gain a comprehensive understanding of the issuer,” cautions the asset manager.

Capital Group also explains how bonds are a great diversification tool for investors. It states that during an economic slowdown, equities are likely to be pressurised. However, in such scenarios, long-dated, high-quality bonds offer better downside protection even with negative or low yields. “In our view, it is therefore important that your bond portfolio has sufficient duration to provide this defensive role,” highlights Capital Group. The asset manager says that over the past decade, companies have been able to issue long-duration bonds to lock in a lower yield for a prolonged time frame amid strong demand.

Additionally, income generation is an important feature of fixed-income investing. On this, the asset manager informs that the yields are significantly higher after the global fixed-income sell-off at the start of last year. It suggests that higher yields imply higher returns and better protection against future price declines. Capital Group further explains, “This also reduces the risk investors overreach for yield to achieve their income objectives. Instead, they can reduce the overall risk of their bond portfolio.”

All in all, the asset manager suggests that global investment-grade corporate credit is the ideal combination of capital preservation, diversification, and income generation. “This is not only because investment grade corporate bonds typically offer a higher yield relative to high-quality government bonds, but also because the market structure has slightly changed,” explains Capital Group.

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