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The investment outlook for fixed income remains a challenge.

Jul 2019
Julianna Donovan

High quality government and corporate bonds offer yields within a very narrow range of about 2.0 – 2.5%, but not much more.

The yield premium (or spread) for owning lower quality bonds is too low, in our opinion, and we are not generally buying bonds from issuers that are not at the high end of the investment grade ratings spectrum. Lower rated bonds also tend to be more highly correlated (prices moving in tandem) with the stock market, lowering their potential diversification benefit. To complicate the challenge, the yield curve is very “flat” – meaning there is very little additional yield offered for investors willing to commit to buying longer versus shorter maturity bonds. So you may wonder: why own any bonds at all? First, bonds offer greater price stability and liquidity, and can be a suitable investment for cash and income needs over a one to three year time horizon. Second, because of the lower price volatility, owning fixed income assets in a portfolio can reduce the overall volatility and help achieve the appropriate level of portfolio risk.

Finally, even with such low yields, if interest rates were to fall significantly lower (a low probability event), bonds
could offer a total return in the mid-single digit range. In that context, bonds represent relatively cheap insurance against a weaker economic backdrop.

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