Why return to fixed income, now? (2024)

FAQs

Why is now a good time for fixed income? ›

It's a new era for fixed income. An unprecedented tightening cycle has given rise to unprecedented opportunities. While the last few years have been challenging, interest rate hikes were the controlled burn needed to rejuvenate the fixed income landscape.

Given where we are now (i.e., post-Covid, falling inflation, higher rates, restoration of bonds' diversification benefits), we believe that the case for fixed-income is very strong. Although cash rates are currently attractive, investment-grade credit yields are currently offering outperformance.

Active fixed income management not only offers the potential for enhanced returns but can also add value by aligning an investor's objectives with risks in several key areas — market structure, credit deterioration, dislocations, and dispersion — where index-tracking approaches may fall short.

Fixed income investments are designed to generate a specific level of interest income, while also providing diversification, capital preservation, and potential tax exemptions.

As inflation finally seems to be coming under control, and growth is slowing as the global economy feels the full impact of higher interest rates, 2024 could be a compelling year for bonds.

While equity markets have the potential of giving higher returns in the short run, the returns are not guaranteed and thus increases the risk. The fixed income markets, on the other hand, offer stable returns and thus lower risk, but the returns might also be modest.

Interest rates tend to begin to decline three months ahead of recessions and reach a cycle low about five months into recessions. During economic downturns, fixed income has been shown to provide diversification benefits and reduce the volatility of portfolios that include risk assets such as equities.

Most experts consider Treasuries to be the safest fixed-income investments because they are backed by the government.

Municipal Bonds

The municipal market remains a favorite fixed-income choice for individual investors due to tax benefits and historically strong credit quality.

How do you survive on fixed income? ›

Reducing your cost of living can be one of the most strategic money moves when you're on a fixed income. This might look like staying in your area but moving to a home with a lower cost to maintain, like trading in the big house with high utility bills or property taxes for a more affordable, lower-maintenance home.

Equity markets offer higher expected returns than fixed-income markets, but they also carry higher risk. 1 Equity market investors are typically more interested in capital appreciation and pursue more aggressive strategies than fixed-income market investors.

As the main disadvantage of this type of investment, we can mention that its profitability is the lowest in the financial market. While higher risk may lead to higher profit, many investors choose to go the secured path, even if it means less reward.

Interest rates tend to begin to decline three months ahead of recessions and reach a cycle low about five months into recessions. During economic downturns, fixed income has been shown to provide diversification benefits and reduce the volatility of portfolios that include risk assets such as equities.

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

Alpha Opportunities, Yield Becomes Destiny

Hence, our bond market outlook is still generally positive over the balance of 2024 as high yields boost the odds of favorable market returns (Yield is Destiny after all) and the potential for ample alpha generation remains favorable.

Now is the perfect time to fix your mortgage to avoid paying higher home loan repayments over the next five years. Even the lowest variable rate offers on the market will be higher than usual due to the rising RBA cash rate hikes pushing current interest rates in Australia.