Even as higher yields helped support returns, market volatility tied to energy shocks and changing rate expectations has led to uneven performance across fixed income. In response, active approaches focus on thoughtful interest rate positioning, careful credit selection, and structure management to seek income while controlling risk in a more uncertain environment.
Key takeaways
Performance recap
Coupon income supported bond returns during a period of heightened market volatility. The sharp rise in energy prices shifted expectations for rate cuts toward the possibility of rate hikes in economies with inflation-focused central bank mandates and greater exposure to energy shocks. Global bond yields moved higher, albeit unevenly, across regions, reflecting differences in perceived inflation risk. Credit spreads widened modestly from cycle lows, and performance across sectors became increasingly differentiated.
The big picture
The U.S. economy entered the year with solid underlying momentum; however, higher energy prices pose an increasing risk to both the growth and the inflation outlook. So far, markets have not shown a broad or lasting negative reaction, but if the disruption to energy flows persists, growth fears will become more broad based, putting downside pressure on yields and upside pressure on credit spreads.
Our approach
Attractive overall yields continue to draw a broad mix of investors, and increased price dispersion across the market is creating pockets of value. We are maintaining an up-in-quality bias in credit focused on diversified sources of yield and have increased duration exposure as a portfolio hedge against downside scenarios. Higher yield volatility brings increased opportunity for tax-exempt portfolios to add value through coupon and call-structure management.
Related items
Notes
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in bonds are subject to interest rate, credit, and inflation risk.
- Diversification does not ensure a profit or protect against a loss.