Tackling the Income Problem

While 2022 has been a challenging year for nearly every segment of the capital markets, it comes with a silver lining for income investors: higher yields. Yields on high-yield bonds, for example, surged from 4.3% at the start of the year to 8.3% at the end of August. History suggests that starting yield has been a fairly reliable gauge of high yield returns over the ensuing five years.

But there’s likely to be a lot of policy uncertainty and interest-rate volatility over the visible horizon, so it’s critical to source income efficiently—generating an attractive income level while also cushioning against the inevitable declines in down markets. The keys: careful asset selection and thoughtful portfolio construction.

The Income Investor’s Dilemma

Income investors seeking to boost yields often find themselves depending on higher-yielding investments such as bank loans, high-yield bonds and dividend-paying equities. While these investments can play a valuable role in a portfolio, they carry more risk than core bonds—as seen in their higher equity market beta and bear market drawdowns (Display).