The Time For Fixed Income is Always – But Especially Now

The Time For Fixed Income is Always – But Especially Now

Schwab Asset Management® insights on why fixed income is especially important in today’s market.

Fixed income has always mattered—and perhaps no more so than today. Stubborn inflation, shifting prospects for Federal Reserve interest rate cuts in 2024 and expectations for a contentious presidential election may be giving broader markets the jitters. Amid this unsettled environment, intermediate high-quality bonds seem particularly attractive.

Bonds are universally regarded as proven diversifiers. For generations, they have represented bedrock holdings in diversified portfolios that have traditionally included income, capital preservation and diversification from riskier assets.  

Yet today, a welcome twist allows investors even more choices. That is, through exchange-traded bond funds, investors have low-cost and convenient access to investments that once traded in markets considered far less transparent than for stocks.

And in today’s market, savvy investors will want to consider broadening out from shorter duration to intermediate maturities (5-10 years) to lock in current bond yields. That’s because with the Fed’s 2% inflation threshold potentially within reach, the U.S. central bank can start actively considering when to cut interest rates and thus create a particularly favorable environment for longer-term bonds and bond funds.

Two bond ETF strategies seem particularly well suited for this environment. Investment-grade corporate bond ETFs are low cost and offer pure exposures to corporate debt securities with higher yields than Treasuries. Intermediate-term Treasury ETFs, also low cost, offer pure Treasury debt exposures and tap into the historically important diversification benefits that can help to counterbalance riskier assets.

Finally, the relative purity of exposure in bond ETFs helps advisors take more control over their clients’ fixed income portfolios. This happens when the ETFs are used to adjust the cost, duration, credit quality and yield profile of an existing bond portfolio.

Of course, inflation is playing a pivotal role in the fixed income market. If the costs for goods and services are trending lower, the Fed may finally be able to cut interest rates as forecasted, offering one more sign that the peak in Treasury yields may be behind us. With this possibility in mind, the outlook for fixed income looks bright, especially given the relatively high starting point for bond yields.

One only needs to look back a few years to see how much more yield bonds now offer investors. In eight fixed income categories, yields in February 2024 stood well above where they ended 2021. Municipal bond yields more than tripled to 3.4%; asset-backed securities soared more than 4x to 5.2%; and high-yield corporate bonds nearly doubled to 7.9%1.  

Although fixed income is a universally stalwart investment option, it’s important to keep in mind that not all fixed income strategies are created equal. With economic conditions constantly evolving, it takes experienced asset managers to stay on top of the latest developments. Indeed, fixed income expertise in the current market environment can make a substantial difference.  

With over 30 years of investment management experience, Schwab Asset Management is one of the largest and most experienced asset managers. To learn more about their fixed income solutions, visit Schwab Asset Management’s website.

1https://www.schwabassetmanagement.com/content/bright-future-bonds-even-after-late-2023-rally

 

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors.

Schwab Asset Management® is the dba name for Charles Schwab Investment Management, Inc. Schwab Asset Management is a subsidiary of The Charles Schwab Corporation.

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