Fixed income was challenged in 2022 due to inflation and rising rates, causing historic losses. But Insight Investment head of global credit, Adam Whiteley believes current high bond yields offer strong compound return potential, especially for active managers.
Key points:
- 2022 was a rare and challenging year for fixed income, with inflation and rate hikes causing sharp losses; however, such extreme negative returns for both US equities and bonds have occurred only three times in 150 years2.
- Current fixed income yields offer compelling opportunities for compound returns with lower volatility than equities, making bonds attractive for retirement income and risk-conscious portfolios.
- Active fixed income management can exploit market dislocations, such as yield divergences and tariff-driven credit spread widening, despite ongoing macroeconomic challenges.
There is no doubt that 2022 was a difficult year for investors, especially for those who had a significant allocation to fixed income. Instead of the steady returns we’d expect from this asset class, the sharp increase in inflation and interest rates saw a jittery bond market, labelled in markets as “the worst bond year ever”. Advisers who thought they were following a lower-risk multi-asset approach, such as those seeking to generate retirement income for their clients, may understandably be cautious about embracing fixed income again.
Painful though it was, we need to recognise that 2022 was a unique year. In fact, only three times in the past 150 calendar years have US equity and bond markets both posted negative returns, and 2022 was by far the worst3. Today, the sharp rise in yields that had such an impact three years ago is now one of the main reasons advisers should be looking to the fixed income markets to deliver opportunities in what remain very uncertain times.
Compounding yields
Albert Einstein described compound interest as the eighth wonder of the world and, at the yields we’re currently able to achieve, we would see significant potential for compound returns from active fixed income management over the medium to long term. At current yield levels, simply letting compound interest work in the background has the potential to generate meaningful returns for clients. With equity valuations continuing to look stretched, and with significant uncertainty of how tariff policy will unfold, investing in bonds may help clients and their advisers sleep a little easier.
Policy factors
Of course, this uncertainty does pose challenges for fixed income markets too as we saw after “Liberation Day” when the original US tariff policy was unveiled. However, the picture is getting clearer regarding the level of reciprocal tariffs the US will settle on.
As more deals are struck, the Federal Reserve (Fed) may look through any tariff-induced price shocks and focus more clearly on growth. As long as the Fed can edge rates lower and credit markets continue to function then we would expect any recession to be relatively mild. This contributes to our positive outlook for fixed income.
Market opportunities
On top of this, the dislocation in markets has driven some unexpected moves which are potential opportunities active managers can exploit. One example would be the divergence in yields between the US and continental Europe, with markets turning to euro-denominated assets as a safe haven amid the storm, driving up valuations.
Surprisingly, the UK Gilt market has moved almost lockstep with US Treasuries, meaningfully underperforming German bunds, even though the UK is subject to lower tariffs than the European Union. The size of the move is difficult to justify. To us this appears an anomaly that we’re quite happy to take advantage of, in both gilts and investment grade credit.
The reaction to tariffs has also created opportunities for security selection. Spreads have widened indiscriminately, with little regard for the actual impact tariffs will have on individual companies. Detailed and rigorous credit research helps us identify companies that are better placed to weather the effect of tariffs and are now available at attractive valuations.
Keeping active
Managing these risks and capturing these opportunities can only be achieved through active management. Active managers have significantly more opportunities to add value compared to their equity peers, which is one reason why passive strategies have a much lower adoption rate in fixed income.
But, as 2022 showed us, fixed income is not without its risks. Focusing on delivering incremental returns from a range of market and stock positions rather than betting the ranch on a particular market outcome is, we believe, the smarter approach. We hope that by delivering consistent performance through changing market conditions we can encourage clients and their advisers to fall back in love with fixed income.
A version of this article first appeared in Money Marketing, a monthly magazine and website for financial intermediaries in the UK.
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
1 Morningstar.com. The 60/40 Portfolio: A 150-Year Markets Stress Test. 18 August 2025.
2 Morningstar.com. The 60/40 Portfolio: A 150-Year Markets Stress Test. 18 August 2025.
3 Ibid.
2622800 Exp: 27 February 2026
