Fixed Income Q4 2022

The past year has been difficult for fixed income investors, with the sharp rise in bond yields leading to a fall in bond prices. After an extended period of low interest rates, bond prices corrected sharply throughout the year as the Fed raised rates and increased its forward projections for those rates. The U.S. Treasury yield curve also inverted, with short-term rates moving above long-term rates. Historically, an inverted yield curve has been a predictor of economic recessions and is therefore worthy of our attention. There is a silver lining to the market correction in bonds; however, for the first time in over a decade, yields on high quality bonds exceed dividend yields on high quality stocks. Because short-term rates have risen the fastest, investors do not need to own bonds with high interest rate sensitivity (also known as duration) in order to earn attractive yields. With much higher yields, high-quality fixed income can now provide a more substantial buffer in portfolios during a stock market correction or an economic downturn.