By Kevin Flanagan

Being a “bond guy,” there’s little doubt about what I think has been the headline in the markets this year: rising rates. We can say that I also think that I will not have much hindsight on this conclusion either. As investors grapple with continued inflation, recession fears and a Federal Reserve “committed” to lowering price pressures, an interesting development has occurred that hasn’t made much headlines; that is, it looks like the “income” has shifted back to fixed income.

Since the Fed first implemented its “zero interest rate policy” in the wake of the financial crisis, investors have been left with a bond market that presented many challenges from an income perspective. . Even after the Fed normalized monetary policy over the 2017-2019 period, interest rates remained at historically low levels. This development has only been exacerbated by the COVID-19 lockdown and subsequent policy response.

U.S. Fixed Income Performance

With the dynamic duo of inflation and a tightening Fed policy, interest rates really had no choice but to rise this year, and that is precisely what has happened. across the fixed income spectrum. To put it into perspective, at the time of this writing, Agg’s (YTW) worst-case yield has risen over 200 basis points (bp), but what’s even more remarkable is the high yield increase of almost 460 bps.

The interesting part of this discussion is where these rate increases have placed absolute yield levels. As for Agg, YTW is now around 3.80%, the highest value since 2009. For quality US companies, a similar story has ensued, as the current level of 4.75 % has also not been observed for almost 13 years. years. In the US high yield arena, outside of the two risk periods of early 2016 and the COVID-19 shutdown, yield levels are now approaching the 9% to 8.80% threshold, the value the highest since 2011. As recently as July last year, the YTW was only around 3.50%.

Conclusion

I have continued to emphasize the outlook for a “fluid” and volatile bond investment landscape for the remainder of this year, if not into 2023. Based on recent comments from Chairman Powell, the Fed now appears determined to lower inflation and “accept the higher recession risk” that comes with the territory. For income-seeking investors, rising bond yields in 2022 have given investors a bit more of a “traditional feel.” for fixed income portfolios than was available over the past decade.

Kevin Flanagan, Head of Fixed Income Strategy

Within WisdomTree’s Investment Strategy Group, Kevin is responsible for Fixed Income Strategy. In this role, he contributes to the asset allocation team, writes content related to fixed income and travels with the sales team, organizes client meetings and provides expertise on existing bond ETFs and future of WisdomTree. Additionally, Kevin works closely with the fixed income team. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was most recently Chief Executive Officer. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. Contributed to Morgan Stanley Wealth Management’s Global Investment Committee, lead author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and worked with the firm’s research and advisory divisions to create asset allocation models for ETFs and fund managers. Kevin holds an MBA from the Lubin Graduate School of Business at Pace University and a BS in Finance from Fairfield University.

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.