The next 12 months are poised to be a comeback year for fixed income, says Gene Tannuzzo, with a focus on quality and credit selection critical to achieving the desired outcomes.
Figure 1: 2022 has been a tough year across fixed income (rolling 12-month total return, %)
A different driver of fixed income
Investors no longer have the benefit of policy-based shock absorbers – like quantitative easing or artificially low rates – to protect their portfolios and will need to find new buffers to cushion the impact of market and economic volatility. This essentially means a higher credit quality: companies with strong fundamentals, a healthy cash flow and lower leverage. It can also involve pivoting away from certain risks, including securities that are overexposed to the low end of consumer credit, to owning asset classes like municipal bonds and agency mortgage-backed securities.