Fixed income offers more attractive valuations and higher income than equities again.
In addition, fixed income has historically offered lower volatility than equities, as well as de-risking solutions and potential diversification benefits. Now is the time to consider bonds.
Fixed income is an important piece of the liquidity management toolkit. We believe liquidity management is an essential part of any investment process, especially at times of heightened volatility. Similarly, an adequate allocation to liquid instruments is a pillar of sound liquidity management. Government bonds and highly rated cash corporate bonds, along with equities, have historically offered market liquidity that may be needed in special circumstances, in contrast to alternative investments or private assets. Recent market events have highlighted the importance of liquidity, and highly rated fixed income can be a useful component of the liquid asset allocation.
Fixed income may offer an attractive de-risking solution. Some investors may feel the need to de-risk their portfolios in the face of rising macroeconomic uncertainty or elevated market risks. For these investors, fixed income may help manage the volatility of the overall portfolio while also helping generate potentially higher income, historically a relatively more stable component of total returns.
Fixed income has become relatively cheap. The valuation of fixed income has improved considerably over the past few quarters, and we are now observing levels not seen in a decade. This is true for credit spreads,1 which have adjusted much higher, but even more so for corporate bond yields which have benefited from the combined effects of the rate and spread corrections.
Fixed income represents an attractive alternative to equities again.
Fixed income had fallen out of favour in asset allocation processes, especially in relation to equities. In recent years, "TINA" (there is no alternative to equities) was the prevailing asset allocation strategy. In our opinion, this is no longer the case…
This post was funded by MFS
