A More Volatile Rate Environment
Fixed income investors are adjusting portfolio strategies to navigate an interest rate environment that has proven more volatile and less predictable than the steady, low-rate conditions that prevailed for much of the prior decade.
Bond duration — a measure of a portfolio's sensitivity to interest rate changes — has become a more actively managed variable, with many fixed income managers adjusting duration positioning more frequently in response to shifting expectations about the path of central bank policy rather than maintaining more static allocations as was common in the low-volatility rate environment of prior years.
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Credit selection has also drawn increased attention, with fixed income investors more carefully differentiating between issuers based on balance sheet strength and refinancing needs, given that the higher rate environment has increased the financial burden on companies and governments with substantial upcoming debt maturities.
Short-duration and money market strategies have attracted substantial inflows as investors have taken advantage of yields on shorter-term instruments that, for the first time in years, offer competitive returns without requiring investors to take on the interest rate risk associated with longer-duration bonds.
Managers Expand Into Private Credit
Some fixed income managers have also expanded into private credit strategies, lending directly to companies outside traditional public bond markets, an area that has grown substantially as banks have pulled back from certain types of lending following the post-financial-crisis regulatory environment.
Portfolio strategists generally advise that fixed income's traditional role in providing portfolio diversification and income has been restored by the higher rate environment, even as the asset class requires more active management attention than during the prolonged low-rate period that preceded recent years.
