What’s Ahead for Fixed Income Investors?
Jessica Schmitt, Director — Investment Communications
Looking through the fourth quarter and the first few weeks here in the new year, what does all this mean for fixed income investors going forward?
Douglas Gimple, Senior Portfolio Specialist
We're in a position that we haven't been in many years. And what I mean by that is fixed income now has income. A two-year treasury is yielding 4.25%, 4.3% wherever it is today. So, what that means is that you've got a way to mitigate future impact to pricing on fixed income, meaning rates go higher and prices come down, you now have income. Whereas last year when we felt all this pain from exposure to duration, interest rates moving so much — there wasn't a lot of income to offset that. Now if you look at the Bloomberg US Aggregate Bond Index, I think the yield there is maybe a little bit north of 5%. So that's pretty good return to hold on to. And then your interest rate fluctuations are going to impact that somewhat. But we now have a cushion, and that's very different than what we've had.
And so, from my personal experience, I've been here at Diamond Hill since July of 2016, and that was on the heels of Brexit. And rates have been pretty low with an exception maybe in 2018 when the Fed finished their last tightening cycle. There really hasn't been a compelling opportunity for income. But now we see that, and it gets back to what fixed income was always been about, which is delivering income, helping to mitigate volatility and reduce some of that risk that maybe you're getting in equities or other areas of the market. Core fixed income in particular is almost back to being that anchor in your asset allocation, which was really hard to stomach even two, three years ago because you're getting a percent and a half yield, maybe 2% yield, but you have all this duration risk when the expectation was that at some point rates are going to move higher.
And so now fixed income is offering up income, which makes it very different than where it's been for a very long time. And so, I think it's hard to say fixed income's exciting because it's a pretty boring topic. I can say that because I'm in that market. But I do think that there's some compelling opportunities within fixed income this year, and it's going to be very different than the way it's been over the last three or four years because you've got that income. And so, I think January was great for investors who were able to open up their statements, and they're not seeing red numbers next to their fixed income. And it's not to say that that's going to continue throughout the rest of the year, point of fact, February right now is negative. The [Bloomberg] Agg is down, I think 72 basis points so far this month, but as income comes in and is paid, we'll see some of that mitigated. And so that's refreshing, and that's something that we haven't seen in fixed income for quite a while.