The Critical Role of Fixed Income
Text on screen: PIMCO
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Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
Ivascyn: Despite the recent selloff in yields, we think fixed income continues to play a very important part in an investor’s overall asset allocation.
TITLE – The role of fixed income in portfolios:, SUB-TITLE – Higher yields may mean: BULLETS – Higher quality, Consistent income, May help protect against economic shocks
This is the higher quality segment of the portfolio. It’s the segment of the portfolio that generates a steady, consistent income stream. That could be a nominal income stream, it could be a floating income stream, it could be an inflation adjusted income stream.
But also, that’s an area of the portfolio that helps protect against negative economic scenarios. Shocks to financial markets, fear in financial markets, a meaningful slowdown in economic growth, which is terrible for nearly all parties.
And we do think, at these higher yield levels now, there’s a bit more cushion from a valuation perspective to be able to provide good price performance during those states of the world that are very, very troubling for end investors.
FULL PAGE GRAPHIC: TITLE – Rising rates create attractive starting yields for fixed income investors. Line chart plots the U.S. yield curve from 1 month to 30 year for both December 31, 2021 and April 1, 2022. It shows that the 2 year Treasury has risen about 170 bps from YTD from where it was on December 31, 2021; and the 10 year Treasury has risen about 90 bps YTD from where it was on December 31, 2021.
The yield curve is very flat today, so you don't need to take the same amount of interest rate exposure you did in the past in order to achieve the same income stream.
The flattening of the curve has been massive, and today, you can generate, again, as an example, the similar yield in a two year maturity with very little duration exposure than you can in longer maturities.
There’s still a place for longer maturity bonds in a portfolio. They tend to provide better price appreciate during challenging economic environments, but for an income oriented investor, especially investors that are tied to floating rate instruments, the yield’s gone up, and prices have remained fairly stable.
So it’s nuanced. Again, across the full spectrum of opportunities, there are some interesting areas that we think investors should focus on and stay invested within fixed income.
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Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed.
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