Fixed income investments have long been a cornerstone of many investors' portfolios, offering a reliable source of income with lower volatility than equities. However, rising interest rates over the past year have presented a challenge for fixed-income investors. The US Federal Reserve has been gradually raising interest rates in an effort to cool the economy and combat inflation. While this has been painful for many fixed-income sectors, it has also led to higher yields and the inversion of the yield curve, which could signal a recession.
Despite these challenges, fixed income is firmly back in favor with investors and wealth managers. However, there are disagreements over the best part of the market to invest in. Some investors are favoring short-term bonds, which are less sensitive to rising rates, while others are looking to high-yield bonds for their attractive yields. Still, others are turning to bond funds, which offer a more accessible, understandable, and convenient alternative to buying individual bonds.
In a recent episode of Engaging Alternatives Spotlight, Elana Margulies-Snyderman, Director of Publications at EisnerAmper, spoke with Liridon Gjergji of New York Life Investments about the fixed-income market. Gjergji noted that despite the challenges of rising rates, there are still opportunities in the market, particularly in the high-yield and short-term sectors.
Fixed income is a synonym for bonds, which are essentially loans made by investors to issuers such as corporations, governments, and municipalities. Investors receive regular interest payments, or coupons, in return for lending their money. When interest rates rise, the value of existing bonds falls, since new bonds will offer higher yields. This can lead to losses for investors who need to sell their bonds before maturity.
Sara Devereux, Head of Fixed Income at Vanguard, oversees a unit with more than $2 trillion in assets. She notes that while rising rates have presented a challenge for fixed-income investors, there are still opportunities in the market. She suggests that investors consider a mix of high-quality short- and intermediate-term bonds, and that they remain diversified across sectors and issuers.
For investors looking for higher yields than traditional bonds can offer, there are alternative options. Fintech company Wealthfront recently launched an automated portfolio that aims to offer higher rates than traditional bonds. The portfolio is made up of a mix of high-yield corporate bonds, municipal bonds, and emerging market debt.
For those who are risk-averse or looking to protect their principal, there are several safe investment options available. One option is to invest in US Treasuries, which are considered one of the safest investments available. Another option is to invest in certificates of deposit (CDs), which are offered by banks and credit unions and offer a fixed rate of return over a set period of time.
In conclusion, while rising interest rates have presented a challenge for fixed-income investors, the market still offers opportunities for those willing to navigate the changing landscape. Whether through short-term bonds, high-yield bonds, bond funds, or alternative options, investors have a range of choices available to help them meet their investment goals.
