Fixed Income: A Strategic Opportunity for Today's Investors
- August 13, 2024
At Oppenheimer, we pride ourselves on delivering the best insights and actionable strategies to our clients, particularly during periods of change. Our expertise is especially relevant in the current financial landscape, where fixed income presents a unique set of opportunities.
While yields have eased from their 16-year highs, the fixed income market still presents an attractive opportunity for yield and potential total return. Now might be an opportune time to consider a strategic portfolio rebalancing. Implementing a portfolio rebalancing (at this point in the capital markets cycle) would allow an investor to potentially realize profits from the strong run the equity markets have experienced and reinvest those profits into the attractive yields currently available in many high quality parts of the fixed income market. This strategy can potentially lower the overall volatility of a portfolio by reducing exposure to riskier equities, while also locking in the attractive cash flows associated with elevated yield levels.
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The Current Economic Climate
As a result of many factors, including recent economic policies and geopolitical uncertainties around the world, inflation has reached levels not seen since the 1980s. Interest rates have followed suit with the FED raising rates 11 times between March of 2022 and January of 2024 in an attempt to combat inflation.
![bloomberg](/_assets/images/images/news-and-media/2024/august/bond-yield3-(003).jpg)
![bloomberg](/_assets/images/images/news-and-media/2024/august/bond-yield3-(003).jpg)
Chart above: Fed Funds Target Rate (blue) vs 10 year on the run Treasury Note Yield (grey)
Source: Bloomberg. As of 8/9/24. Time period: January 2007 to August 2024.
The FED’s significant action has finally caused inflation to moderated and begin leveling off. As a result of slowing inflation data, some believe the FED is poised to cut rates as soon as late Q4 2024 or earlier Q1 2025 creating the potential for capital appreciation in fixed income assets as interest rates decline and bond prices appreciate.
Why Fixed Income Today
Owning a diversified portfolio of assets which includes both stocks and bonds has been a tried and true approach to investing for centuries. However, yields on fixed income assets have been relatively unattractive for so long, while equities markets have continued to climb, that many investors find themselves out of balance with both their original target allocations as well as their portfolio risk levels and they are trying to get back on track.
Why does it make sense now?
- Attractive Yields: With interest rates at relatively high levels, the yields on fixed income securities are particularly attractive, offering better returns than they have in years.
- Stable Income Stream: Fixed income securities offer predictable returns through regular interest payments, making them an attractive option for income-focused investors.
- Capital Preservation: These investments are generally less volatile than equities, helping to preserve capital while still generating returns.
- Tax Advantage: For clients residing in high-tax states, municipal bonds present an excellent opportunity to enhance their investment returns through tax-efficient income generation. These bonds are typically exempt from federal income taxes and, in many cases, state and local taxes as well. This exemption can significantly increase the net yield for investors in higher tax brackets.
- Diversification: Including fixed income in a portfolio can potentially reduce overall risk by balancing the more volatile nature of stocks.
![efficient frontier](/_assets/images/images/news-and-media/2024/july/efficient-frontier.jpg)
![efficient frontier](/_assets/images/images/news-and-media/2024/july/efficient-frontier.jpg)
As of 7/24/25. Source: Zephyr Analytics. Time period is 7/2004 – 6/30/24.
Key Takeaways
Prepare for Future Rate Changes: With the potential for lower interest rates on the horizon, locking in higher yields now can provide advantages in creating strong cash flow and positioning a portfolio to take advance of any future rate reductions creating a strong total return (Yield + Price Appreciation).
Review Your Portfolios: Now is an ideal time for individuals to review their portfolios and their allocation between fixed income and equities. This is particularly important for older investors looking towards retirement and the need for additional portfolio income to replace salaried income after retirement. By taking short-term profits and reinvesting in fixed income, you can align your investments with your risk tolerance and income needs.
Oppenheimer's Comprehensive Fixed Income Solutions
Oppenheimer offers a complete range of fixed income instruments and capabilities to meet diverse client needs. Through consultation with an Oppenheimer Financial Professional, clients can explore various options, from managed fixed income portfolios to investment in individual municipal, investment-grade (IG), or corporate bonds.
This material does not reflect the views of Oppenheimer & Co. Inc. (Oppenheimer) or Oppenheimer Asset Management Inc (OAM), and is subject to change at any time. It is not investment advice, a recommendation, or solicitation to act on any security or strategy. Oppenheimer and OAM do not provide legal or tax advice.
Forward-looking statements regarding the economy and financial markets are current as of the date cited, involve significant known and unknown risks, uncertainties and assumptions. Results vary.
Special Risks of Fixed Income Securities: Prices of securities will go down as interest rates rise. Issuers of bonds may suffer credit risk, being not able to make principal and interest payments on time. Liquidity of an active market may preventing buying or selling at will, despite holder’s time horizon.
High-yield and less than investment grade bonds are not suitable for all investors, due to the risks outlined above, and thus should only comprise a modest portion of a portfolio.
Indices are unmanaged, hypothetical portfolios of securities that are often used as a benchmark in evaluating relative investment performance. An index should only be compared with a similarly comprised investment with a similar objective. An index is not available for direct investment, and it is expressed net of all costs, charges, and fees.
Oppenheimer and OAM are a wholly owned subsidiary of Oppenheimer Holdings Inc. (OPY). Securities are offered through Oppenheimer, a registered broker/dealer and investment adviser. No FDIC or other similar deposit insurance applies in any way, nor does Oppenheimer guarantee a gain or protect against a loss. Investing involves risk, including possible loss of principal.
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