Up until 2022, fixed income was the “safe” part of the portfolio. In the low or zero interest rate environment that was the normal for so long, fixed income was stable. The 60/40 approach worked well for a long time. That allocation strategy allowed investors to use equities to find big returns while shielding portfolios from bumpy markets.
Unfortunately, stocks and bonds both saw losses as interest rates were raised to fight inflation. Additionally, geopolitical conflict dampened markets everywhere. 2023 has been a different story, but it is still quite unlike any market before it. Opportunities now abound in fixed income. Despite this, many advisors remain gun shy after a rocky 2022.
To capitalize on new fixed income opportunities, advisors need to reevaluate their fixed income playbook. A coming fixed income symposium could help investors get their footing as the new normal emerges.
2022 Left Investors With Fixed Income Questions
According to VettaFi head of research Todd Rosenbluth, “In 2022, many advisors started questioning having a healthy weighting in fixed income in asset allocation strategies, as the average bond fund declined in value. However, there’s now stable income available in lower-risk Treasury ETFs and even higher income to be earned in products that take on additional credit risk.” Rosenbluth also pointed out that “there are now actively managed ETFs from some of the leading asset managers such as BlackRock, Capital Group, Franklin Templeton, and JPMorgan for advisors that prefer to have experienced professionals make the bond allocation decisions.”
VettaFi vice chair Tom Lydon noted that many investors pulled back their investments. Some of these investors haven’t come back into fixed income yet. “After the worst year for both bonds and stocks in over 40 years,” Lydon said, “investors are keeping a chunk of their powder dry in money market funds. Today, there is a record $6 trillion dollars on the sidelines getting 4.5%–5% interest. And investors are just fine with that, as they are once again getting paid to keep their money safe. The risk is that if the stock market and the bond market continues to stabilize, those same investors could find themselves missing out in the coming years.”
The Future of Rate Hikes
The Fed has signaled that they are going to continue to push hikes until inflation is fully curbed. Speaking to this, Lydon added, “that is their number-one goal and may push the U.S. economy into recession. If they get inflation under control and we find ourselves in a recession a year from now, the Fed can cut interest rates again to fend off a strong recession. However, if that does happen, money market funds won’t be paying what they are paying now, bonds would have appreciated, and investors will find themselves putting money back into stocks and bonds after they have potentially moved even more to the upside.”
Naturally, if an investor managed to pull money out of bonds and the market last year, they might feel reticent to come back in. But the upside to staying invested is too hard to ignore. Despite many declaring the 60/40 portfolio dead, Lydon sees it as rising from its ashes. “You dodged a bullet by taking some chips off the table a year or so ago. Congratulations. Now don’t give back that potential appreciation by feeling safe. These are the times you should be leaning in.”
The replay of the Fixed Income Symposium is now live; registration to view on-demand is available at the link.
For more news, information, and analysis, visit the Fixed Income Channel.