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:
- Attractive yields: Higher bond yields can offer investors the potential for higher income and the opportunity to lock in those yields for longer periods of time. Short-term yields are still at attractive levels, but there is the potential for these yields to decrease if the Federal Reserve starts cutting rates in the future.
- Diversification: Fixed income strategies can be a powerful force to combat market volatility and potential economic downturns. While this is not a given, we typically see that during times of market stress, yields tend to fall, pushing prices up, and therefore, rewarding fixed income investors while their equity portfolio falls.
- Potential for capital appreciation: Fixed income strategies are primarily known for providing income for investors. However, fixed income investments can offer opportunities for capital appreciation as well, especially if interest rates decline. However, we don’t recommend investors purchase fixed income hoping for yields to move lower; income should be the focus as illustrated in the chart above.
- Favorable risk/reward dynamics: The higher level of yields can offset future price depreciation resulting from rates moving higher. This enhances the risk/reward dynamic of owning fixed income in a high yield environment.
- Economic outlook: Although economic data remains resilient, growth metrics are beginning to reflect a more muted growth outlook for the economy. Fixed income can provide a ballast to the portfolio during times of stress while providing the income needed to weather the uncertainty.
Fixed income can provide a level of stability during times of economic and/or market stress. You are simply lending money to a government or corporation who then pays you a coupon payment (yield) periodically for a specific period of time. Then, you receive the money you lent when the bond matures. As much as we have simplified fixed income investments, it is critical to perform your due diligence on credit quality, duration and terms. This is an asset class where active management plays a key role in customizing a portfolio to meet your specific financial objectives.
Questions on fixed income investments? Connect with our team to learn more.
This information does not constitute investment advice and is not an offer to buy or sell a security. The material is provided for general information and educational purposes and is based on information provided to us by sources deemed to be reliable. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Past performance is no guarantee of future results and asset values will fluctuate with changing market conditions. There is no guarantee that the views and opinions expressed in this document will come to pass. Investing in the market involves gains and losses and may not be suitable for all investors. All investments are uninsured and can lose value. AI (artificial intelligence) was utilized to assist in the creation of this marketing piece.
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