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Fixed income
Fixed income markets may have changed, but the same lessons apply
After several years of ultra-low yields and highly accommodative stances by policymakers globally, fixed income has seen significant shifts across all sectors, paving the way for a new-look market environment.
With cash yields the highest in decades, investors have naturally gravitated towards short-term instruments such as money markets and certificates of deposit. However, for investors with a long-term horizon, reinvestment risk – the risk that future cash flows are invested at lower prevailing rates – means that today’s returns on cash cannot simply be extrapolated into the future. Finding strategic and diversified income sources can help minimize reinvestment risk and maximize risk-adjusted returns over a market cycle.
With that in mind, it is important investors do not forget the lessons of previous market cycles when considering fixed income portfolio allocations.
Key takeaways
- Diversification remains essential for portfolios, and fixed income is an asset class that offers varied risks and opportunities across sectors.
- Previous market cycles have seen bonds rally following the end of interest rate hikes.
- Active management remains important for navigating volatile markets.
Endnotes
1. The power of private real assets, Nuveen Real Assets, 2022.
2. Source: Bloomberg LP. As of 30 Jun 2023. Representative indices: High yield corporates: Bloomberg U.S. Corporate High Yield 2% Issuer Capped Index; Senior loans: Credit Suisse Leveraged Loan Index; Emerging market debt: Bloomberg Emerging Market Aggregate Index; Preferred securities: ICE BofA U.S. All Capital Securities Index; Investment grade corporates: Bloomberg U.S. Corporate Investment Grade Index.
3. Source: Bloomberg LP, Nuveen. Average of performance over the last four Fed tightening cycles. Agg Index is the Bloomberg U.S. Aggregate Index.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC.
