Preparing for the Pivot: Key Takeaways From Our 2022 Advisor Fixed Income Portfolio Review

Many advisors who moved into cash last year as interest rates rose sharply are asking: When is it time to get back in to longer-term fixed income investments and how?

The outlook for fixed income appears compelling after last year’s sell-off, which was spurred by Fed interest rate hikes. Starting yields across most fixed income sectors are the highest in more than a decade. Since yield has tended to be a powerful indicator of forward returns, the five-year return expectation for the average advisor portfolio doubled to 4.7% in December 2022 from 2% in December 2021. Higher yields also potentially provide a stronger cushion against further rate hikes or spread widening, offering more attractive downside protection than a year ago.

Bonds are back

The question on most advisors’ minds focuses then on timing. Is it best to wait for the Fed to pause rate hikes before stepping out of cash? In our 8th annual review of advisor fixed income portfolios, we analyzed this question among others and concluded that now may be a good time to move cash off the sidelines into fixed income despite recent volatility.

Figure 1 shows core fixed income performance relative to cash over the last seven Fed rate-hiking cycles since 1980. Over the typical 19-month cycle, rates initially rise and core fixed income underperforms cash, as happened in 2022 when the Fed began aggressively raising rates.