Bonds Are Still an Attractive Option in Current Environment

Extracting yield in the current market environment is a prime option for getting bond exposure. However, the risk associated with depreciating prices shouldn't put off prospective fixed income investors. Despite record issuance this year amid higher-for-longer inflation, investors may still express hesitance towards owning bonds.

Rate hikes may have soured the taste of owning bonds for their price appreciation benefits as the stock market continues to rally even in the face of high inflation/interest rates.

Still, the risk associated with owning bonds now could pay off in the long term. Especially if the economy starts to cool off. This makes bonds a relative value given their appreciation potential should the U.S. Federal Reserve finally reverse course and institute rate hikes.

“Stable interest rates with gradually falling inflation and economic growth of 2-3% could create an environment where investors will be rewarded for owning risk,” said Pramod Atluri, a fixed-income portfolio manager at Capital Group, in a Morningstar report. “However, given the strong outperformance of risky assets over the past year, I think staying heavily invested in risk isn’t prudent.”