A COVID-era guide to fixed income

Investment Directors Anand Dharan and Amar Reganti lay out their proposed framework for building a more resilient fixed income allocation that is equal to the challenges of today’s environment.

Views expressed are those of the authors and are subject to change. Other teams may hold different views and make different investment decisions. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional or institutional investors only.

This spring, investors experienced one of the most volatile periods in modern market history. The speed with which financial markets sold off in March, and then rallied following unprecedented steps by the US Federal Reserve (Fed) and the US Treasury, shook even seasoned market participants. There has been active intervention in nearly every major fixed income sector. As of this writing, we face 10-year Treasury yields at historic lows (again) and mounting uncertainty about the role fixed income should play in an investor’s asset allocation.

 

For some time now, we have been advocating that investors rethink the age-old notion of a bond portfolio as being an “all-purpose” allocation that has to achieve all of the objectives we typically associate with fixed income: liquidity, diversification, income, and total return (Figure 1).

FIGURE 1

We firmly believe this fundamental rethinking must continue in the midst of the ongoing COVID-19 crisis. In fact, with economic and public-health uncertainty likely to be the norm for the foreseeable future, we would argue that investors need to think even harder about the overall resilience of their fixed income allocation and how each component of it contributes to making the whole greater than the sum of its parts.

Furthermore, we find that record-low interest rates and recent spread behavior have increasingly led to…

 

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Andrew Bayerl
 CFA, CAIA

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