Page 16 - ISQ Outlook 2023

INVESTMENT STRATEGY QUARTERLY

The ‘Income’ Is Back In Fixed Income

Doug Drabik, Managing Director, Fixed Income Research
Nick Goetze, Managing Director, Fixed Income Solutions

Persistent volatility battered global bond markets in 2022,
creating persistent investor uncertainty which could be
attributed to various economic circumstances, including: Market forces will likely continue to move the
inflation, geopolitical events, and recessionary fears. The yield needle in a distorted pattern in 2023, yet
rising interest rate trend throughout the year, to say investors seeking income and cash flow may
nothing of U.K. political turmoil, moved global developed benefit from the current attainable yield levels.
economy benchmark 10-year government bond yields in
an abnormally wide range. As you may already know, there
the opportunity to lock in these income levels. For this specific
is an inverse relationship between bond rates and bond investment asset, locking in higher income can be achieved
prices. Taking the U.S. 10-year Treasury yield move in a when purchasing individual bonds with stated maturity dates,
wide 1.52% to 4.25% range as a worked example, this allowing investors to receive purchased yields for a predeter-
mined period of time (up to the maturity) that is not affected by
translates to an illustrative price move akin to $123.93 to
interim price/rate moves.
$98.99, or nearly 25 points. The longer the maturity, the
greater the price impact associated with large rate swings. DIFFERENT INVESTORS, DIFFERENT OPPORTUNITIES
Market forces will likely continue to move the yield needle in a dis-
2022 underscored the distinction between two investor types:
those seeking total return and those needing/wanting income. torted pattern in 2023, yet investors seeking income and cash flow
Price plunges decreases total returns (because of decreasing may benefit from the current attainable yield levels in the United
prices), yet the rate increase provides investors an opportunity States. High quality (investment grade) taxable and municipal
to increase income. It has been a long time since investors had tax-equivalent yields are well above 5% in modest duration invest-
ments. Historically, procuring income at a plus 5% level in an asset

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