Time to allocate to fixed income | Insight Investment

Income-based returns are back.

With yields normalising and fixed income markets offering compelling risk-adjusted returns, investors no longer need to risk equity-type drawdowns or sacrifice liquidity to achieve their objectives. This paper explains why we believe now is an opportune time to increase fixed income allocations.

Key takeaways:

• It could be time to diversify away from a lopsided equity world: US equities now dominate the MSCI World Index, driven by the outperformance of mega-cap tech stocks. This concentration increases exposure to US markets and the dollar. Fixed income offers a potential path to improved risk-adjusted returns and reduced volatility.
• Yield is back, and we believe it’s here to stay: The era of ultra-low yields is over. Intermediate and long-dated bond yields have returned to pre-crisis levels, while long maturity yields have been pushed even higher by the scale of government bond issuance. This means long-term return objectives may now be achievable with fixed income alone.
• Yield is just the starting point for returns: Bond markets are less efficient and more opaque than equities, creating exploitable opportunities for skilled active managers. Volatility and market dislocations favour flexible mandates and innovative approaches.
• Reliable returns, lower drawdown risk, and diversification benefits: Bond returns are primarily income-driven, which has resulted in lower volatility and shallower, shorter drawdowns than equities. Even in challenging environments, fixed income has demonstrated resilience, with the contractual nature of bonds providing natural downside protection.

• Corporates are well positioned: Credit metrics remain healthy across investment grade and high yield issuers. Debt profiles are being actively managed, with maturities well spread to minimise refinancing risks. Rate cuts and AI investment are expected to support economic growth, which means we don’t expect a US recession.

In our view, the current investment environment presents a strong case for increasing exposure to fixed income. Investors have the opportunity to lock in attractive long-term income streams without taking on equity-like drawdown risk or sacrificing liquidity. With global equity markets increasingly dominated by a handful of US mega-caps, the diversification benefits of fixed income appear particularly compelling.