Fixed income as a growth asset

Fixed income has long been regarded as a tool for capital preservation, liability hedging and predictable income streams. But in an era of elevated absolute yields and steeper yield curves, does the asset class merit a fresh look? In a new report, BNY Investments argues fixed income is not just for defence, but also a genuine engine of long-term capital growth.

We suggest the case for looking at bonds in this way rests on three pillars:

• The power of compounding: When yields on sterling or euro-denominated bonds are in the 4–6% range, reinvesting coupons or interest payments can generate exponential growth over time.
• Attractive relative returns and lower volatility: Historically, global high-yield credit has matched the compound returns of global equities when coupons are reinvested, yet with roughly half the annualised volatility of broad equity indices.
• Flexible, active investment management to unlock value: Passive bond strategies may appear low-cost, but they can miss opportunities to harvest mispricings across government, investment-grade and high-yield sectors.

Also in the report, it outlines three fixed income strategies that offer opportunities for ‘equity-like’ returns: 

• High yield credit: Offers the potential for attractive returns with manageable default risk, especially in short-dated bonds.
• Fallen angels: Bonds that have been downgraded from investment grade to high yield can present value opportunities due to forced selling (from both active and passive investors) and the possibility of a subsequent recovery. 
• Strategic bond strategies: Flexible mandates allow managers to pivot across sectors and geographies, giving them the freedom to capture incremental returns.