Fixed income investments are a type of investment that provides regular returns to the investor over a specified period of time, in the form of interest coupon payments. There are many kinds of fixed income securities including Certificates of Deposits (CDs), U.S. Treasury bonds and corporate bonds. Within corporate bond fixed income, there are varying degrees of credit qualities which dictate the level of yield a bond pays. The lower the credit quality, the higher the yield needs to be to entice investors to buy the bond because of the increased potential for the corporation to default.
Fixed income investments are currently attractive for several reasons:
- Higher yields than in recent history
- Diversification benefits
- Potential for capital appreciation
- High yields can offset rates moving higher
- An uncertain economic outlook
While fixed income currently presents an attractive opportunity, investors have been skeptical in recent years about holding bonds in their portfolio. Investors remember the pain felt in 2022, when interest rate volatility was heightened. In 2022, the U.S. Aggregate Bond index declined 13% as the Federal Reserve fought inflation and ended up hiking rates by more than 500bps. Fast forward to today, these elevated yields benefit investors looking for diversification and who rely on income generation from their portfolio.
Historically, starting yields on fixed income have been the strongest predictor of future total return. With yields at multi-decade highs, the income has been put back into fixed income. Not only do higher yields provide a higher level of cash flow, but they also provide a level of cushion in the event interest rates rise in the future.
It is important to recognize that we are in a much different market environment from 2022, when starting yields were much lower, and did not provide an offset to price depreciation. The starting yield for the ten-year U.S. Treasury bond was 1.8% in 2022, and the yield on the ten-year Treasury as of end of May 2025 was 4.4%. The current levels of yield provide a strong entry point for investors; however, it is important to be well diversified across durations, credit quality and sectors. There are many reasons for investors to consider fixed income investments. Let’s take a closer look:
