Fixed Income Investing in the Late Cycle

– Investors should remember that “safe haven” asset classes may not have higher yields, but can potentially provide protection in the later stages of the economic expansion.

– When selecting fixed income investments in this environment, investors should think carefully about knowing what they own, evaluating performance and determining whether cheaper is better.

The Decade-Long Hunt For Yield

As the global economy struggled in the wake of the financial crisis, global central banks stepped into the breach, launching multiple waves of asset purchases and implementing low or even negative interest rates to stimulate growth. Questions remain over the effectiveness of this policy, but it certainly did kick-start the hunt for yield. Investors moved out of “safe haven” assets, which now lacked yield, and ventured into other areas of the financial markets seeking stronger returns.

The strategy of taking on more risk in order to sustain traditional fixed income yield is not necessarily wrong. In fact, over the course of this cycle, it has delivered results to investors. A portfolio invested just in U.S. Treasuries returned 2.1% per year between 2009 and 2018; meanwhile, sectors like local currency emerging market debt (EMD) returned 8.2% per year, and U.S. high yield returned 11.1% per year*. In short, investing in higher yielding sectors delivered higher returns over the last decade.