On the upswing

Question: How can fixed-income investors position themselves for both yield and lower downside risk?

RJ Gallo: I think investors need to realize that yields are significantly higher today than they were say after the onset of the pandemic in the summer of 2020. For example, the 10-year Treasury yield at one point was as low as about 0.5%. Now it's around 3.5%. If you look across the whole landscape of fixed-income sectors, treasuries, investment grade corporates, high yield corporates, mortgages, municipal bonds, you name it, all yields have risen hundreds and hundreds of basis points. That means investors now have income yield as a source of total return in the fixed income sector, which wasn't true back when the Fed had zero interest rates. That is a very compelling and restoring facet of fixed income in terms of fixed income as a component of your diversified investment strategies. At this point in time however, I wouldn't suggest going out and buying the highest yield bonds out there as a source of return. We think that it would be better to favor high quality bonds, say treasuries and mortgage-backed securities at this point in time because as recession risk rises, we think high-quality bonds are apt to outperform mid and low-quality bonds like investment grade corporate bonds, or high-yield securities. Over time, as recession risk sets in, we think those securities will underperform and we might reassess. But at this point in time, we favor up in quality within your fixed income portfolios. The good news is that you can still get yield because all yields are much higher than they were. I would also note one final thing, cash is back as an asset class. With the Federal Reserve having the Fed Funds Rate around 5% at this point in time, cash and cash equivalent investments, T-bills, money market funds, offer 4% to 5% yields. Investors who want safety, no or low-price risk, yet still want some meaningful nominal income, can use cash as another component of their investment strategies, something that really just wasn't very attractive when Fed funds were around 0%.