Advisors are feeling the heat from clients regarding their traditional portfolios as volatile markets continue and inflation soars. This is being felt keenly for retirees or those looking to retire soon with bond markets succumbing to interest rate pressures and investor fears.

Traditional investments into bonds have seen a negative return over the course of the last year, an uncommon phenomenon for the Bloomberg U.S. Aggregate Bond Index (the Agg); in the 45 years of the index, there were negative annual returns in only four of those years, explains Mark Hackett, chief of investment research for Nationwide’s Investment Management Group, in a recent blog.

Of the four years that the Agg offered up negative returns, they never happened in consecutive years, but that’s a trend that might be changing. As of February 10, the index was down 4.1%, a drop that means that February will most likely end in a loss as well, possibly becoming the worst month on record.

The reason for the Agg’s negative performance comes down to a confluence of pressures. Hackett explains: “This is due to rising interest rates (the 10-year Treasury yield climbed 51 basis points since the start of the year), modest widening of credit spreads, and a low absolute level of yield that provides little return protection against negative price moves.”

The real negative return for investors within bonds is even more pronounced when factoring in inflation, and it’s creating a scenario where investors have decreasing purchasing power, which can lead to panic and sell-offs that would only exacerbate the losses in the bond market. The last decade, and particularly the last five years, have seen big, sustained inflows into bonds, but with market trends changing, so too are the flows.

Investment-grade and high-yield funds have experienced net outflows for the last five weeks, and bond ETFs are reflecting this as well; bond ETFs lost $1.5 billion in January, and it is the first time that there have been substantial outflows in the last year aside from the March 2020 pandemic shock. It’s a huge turnaround from $27.3 billion in inflows just a month prior. High-yield ETFs experienced a record loss in January with $7.6 billion in outflows.

“This is meaningful because it reflects that some of the emotional decision-making we normally see in the equity market is transitioning to the bond market. If this continues, it could exacerbate losses, as managers of funds and ETFs will need to raise liquidity, which continues to increase selling pressure,” Hackett explains.

For advisors looking for income and yield for their clients from the bond portion of portfolios, Hackett anticipates a pivot to credit-sensitive bonds, dividend-focused equities, options-based strategies, and annuities that offer downside protection as popular choices in an inflationary, rising rate environment.

Investing in volatile markets driven heavily by negative sentiments can be difficult for advisors. Nationwide offers a line of actively managed ETFs for advisors that cater to a range of investment exposures and strategies for those seeking retirement income options for their clients in the midst of changing market conditions.

For more news, information, and strategy, visit the Retirement Income Channel.