The new face of fixed income

Investing in bonds is changing as yields rise

For the last 30 years, bonds have helped boost portfolios. With fixed income prices now falling, it’s time rethink how these assets fit in a portfolio.

Simply put, when interestrates rise, bond prices fall. This is because investors won’t pay for a bond that has a lower interest-rate, which ultimately decreases the value of the bond.

Beginning in the early 1980s, bond yields began to move lower as the threat of inflation subsided. This allowed investors to enjoy a combination of high current income and strong capital gains without much volatility – a trend that has been in place for several decades.

But now, with bond yields rising, fixed income prices are falling. As a result, their purpose in your portfolio is changing.

There’s always value in low correlation assets within a portfolio. The key is to combine assets to improve returns without increasing your risk. Since bonds and stocks tend to move in different directions, from a diversification standpoint, owning bonds in your portfolio can reduce its overall volatility. Bonds still provide a safe-haven. They preserve capital, provide diversification benefits and dampen down volatility in a portfolio. That’s a significantly different role than what they’ve played in the past.

Changing one’s view of the role fixed-income has been playing, from a portfolio booster to a diversifier can be a challenge for some investors, but adjusting your investment choices so they adapt to the current climate is important.

The new role that bonds can play in your portfolio is a good place to start, and advice from your professional advisor can help you make the decisions that are right for you.