Is Higher Income for Real?
December 05, 2022
Read Time 1 MIN
No Easy Path for the Fed
As we look ahead to 2023, the Federal Reserve (Fed) has the challenging task of trying to combat inflation without causing a hard economic landing. While the market is excited about the recent pullback in monthly CPI data, it’s important to remember that, historically, inflationary events have lasted a long time, going through several peaks and troughs. In addition, government debt is very high and continues to grow, and the cure for inflation (tighter policy) is “kryptonite” to an overleveraged economy. Accordingly, the Fed faces a very challenging market backdrop as we head into the new year (3:37).
Higher Yields Here to Stay
For bond investors, the good news about this market backdrop is that higher yields are here to stay. Carry has come back to the fixed income market, leading current income to play a more significant role in bond returns (7:06). For example, at current yields, the income earned on the current 10-year Treasury note provides a return buffer even if rates continue to rise next year. For high yield, the carry is even higher by historical standards, and as a result, we are seeing increased demand for high yield strategies (13:44).
All in all, the market outlook for bonds is positive. Interest rate normalization has returned us to a world where carry is a meaningful component of return, where duration, credit and liquidity risk are priced more appropriately, and where a far greater range of scenarios can lead to positive returns. Looking ahead to 2023, we believe the role of fixed income in diversified portfolios will be as important as ever as correlations also return to normal in the absence of quantitative easing.
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IMPORTANT DISCLOSURES
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included herein.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
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IMPORTANT DISCLOSURES
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included herein.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities/financial instruments mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.