Seek durable income

Given cash’s long-term underperformance versus other asset classes, we see quality bonds as a credible alternative for investors seeking durable portfolio income. Historically, the probability of bonds outperforming cash rises with longer holding periods—from 65% over 12 months to 82%, 85%, and 90% over five, 10, and 20 years, respectively. We expect mid-singledigit returns for medium-duration quality bonds in US dollar terms over the next 12 months.

Quality bonds also look appealing in a downside scenario. If US economic growth disappoints and data weakens, we expect quality bonds to rally, potentially delivering significant capital gains.

Adding carefully selected higher-yielding credit—such as high yield bonds, emerging market debt, or private credit— can improve portfolio diversification and enhance return potential. Provided the global economy avoids a severe recession, strong corporate fundamentals and relatively low leverage levels should help keep default risks at manageable levels.

We are constructive on private credit, which remains healthy with yields near 10%, low defaults and leverage, and ample covenants. We view private credit as an attractive addition to long-term portfolios but recommend selectivity, favoring sponsor-backed loans in the upper-middle market, large-cap deals, and sectors less exposed to cyclical pressures.

Investors seeking income might also consider equity income strategies, including high dividend, dividend growth, or yield-generating structured investments. Approaches such as put writing and covered call writing can enhance income by harvesting volatility premia and diversifying sources. However, these may be taxed as capital gains in some jurisdictions. We estimate that combining high dividend, dividend growth, and option strategies could deliver a total yield of around 5-7% per year. Options do carry unique risks that investors should understand before using them.