For investors wondering how to navigate the uncertainty of fixed income markets at present, there are some sound reasons to be positive. For a start, the weak bond returns in 2022 resulted in a significant increase in yields – and, by extension, the highest level of income available to bond investors we have seen for many years. Midway through 2023, this remains the case, with bond yields still well above the levels seen during the past decade.
As we move into the second half of 2023, there is likely to be more nuance in returns across fixed income sectors. This was demonstrated by the recent volatility associated with the instability in the banking sector when credit spreads among financial issuers and higher-yielding sectors widened – although credit spreads are now tighter than they were at the beginning of the year.
In such an environment, taking a flexible multi-sector approach could help investors better capture the income-generating power of bonds while at the same time harnessing the benefits of diversification to deliver reliable income streams.
By investing broadly to diversify risks rather than concentrating exposure in one sector, there is the opportunity to generate an attractive high income and more consistent returns. That being so, four key credit sectors stand out, which combined target reliable income with an attractive risk/return profile: emerging market debt; high-yield bonds; investment grade bonds; and securitised credit.
To read the rest of this article by Ed Harrold, Capital Group’s investment director, visit the September edition of Portfolio Adviser Magazine