Whitepaper: Fixed Income Allocations in a Rising Interest Rate Environment

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Fixed Income (Bonds) is the Swiss Army knife of the investment portfolio - adaptable to many different situations and able to be configured in a variety of different ways. Their role is to be reliable sources of income and to provide a locus of stability that can enable other portions of the portfolio to take on additional risk while keeping overall portfolio risk within expected ranges.

Investors have enjoyed a generations-long secular bull market in bonds as yields have declined from the highs of the early 1980s until today. Unlike stocks, bond returns arise almost exclusively from income over long periods of time, and with current income levels of 2-2.5% on the benchmark 10-year US Treasury, bond returns on a prospective basis are likewise constrained.

Thus, the dilemma that faces investors as they assess the merits of a low-return asset class:

  • Are the roles of income generation and stability enhancement that bonds play in a portfolio still valid?
  • Is there an asset class that can substitute for the combination of income generation and volatility dampening?

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