As inflation cools and central banks approach the end of their hiking cycles, CIO thinks it's time to lock diverse streams of income into portfolios. (UBS)

CIO advises investors to find more durable sources of income, including in longer-duration fixed income, equity markets, real assets, and structured investments.

Cash and money market funds have become more appealing recently.

  • The yield on the three-month US Treasury traded near a 23-year closing high of 5.50% on 28 August, and remained at 5.48% on 11 September.
  • Short-term rates have risen more than 525 basis points compared to the start of 2022.
  • Both the Fed and ECB raised rates in July, and markets are still braced for the potential for further tightening from both.

But we believe the attraction of cash is likely to prove short-lived, and investors should lock in durable income.

  • Both the Fed and ECB signaled that an end to rate rises is likely near at hand after hiking 25 basis points at their July meetings.
  • Investors can take this opportunity to lock in attractive yields before markets start to price lower rates in the future.
  • We believe investors should consider reinvestment risk—the chance that yields on maturing fixed income instruments are higher than those on new securities.

We think it's time to add exposure to bonds.

  • We favor higher-quality segments of fixed income, given the all-in yields on offer and the potential for capital appreciation as growth and rates fall.
  • Investors can also find attractive income opportunities in equity markets, through high-dividend and quality stocks.
  • Yield-generating structured investments can offer alternative ways to add durable returns.

Did you know?

  • The Federal Reserve hiked by 25 basis points at its July policy meeting, taking rates to the highest level in 22 years and marking its 11th rate increase in its last 12 meetings.
  • The MSCI World High Dividend Yield index offered a 3.8% yield as of 31 August. These equities are mostly in the more defensive parts of the markets and are relatively resilient when the economy slows as we expect these dividend payments to be relatively stable even in the event of a recession, based on historical experience.

Investment view

Surprisingly robust economic data have boosted bond yields, providing investors with a good opportunity to lock in currently elevated rates for an extended period. In fixed income, we like opportunities in the 5–10-year duration segment in high grade (government), investment grade (incl. select senior financial debt), and sustainable bonds. Exposure to actively managed income strategies and yield-generating structured investments can help investors take advantage of the breadth of opportunities.

Main contributors - Christopher Swann, Vincent Heaney, Matthew Carter

Original report - Where can I find portfolio income?, 11 September 2023.