Video: Seek diversified income
Seek out quality
We believe the recent increase in benchmark government bond yields in USD, EUR, and GBP provides an opportunity for investors looking to lock in elevated yields and diversify portfolios. We do not expect central banks to change their rates hurriedly in response to the rise in energy prices, and even if energy prices stay higher for longer, yields could fall over the medium term if investors begin to price recession and central bank rate cuts. After many years of strong equity performance relative to bonds, investors may have an opportunity to rebalance toward bonds, to bring allocations back into line with long-term plans, and to help manage potential equity risks. We like looking for opportunities in quality government bonds with short-to-medium maturities, especially in the US, Eurozone, and the UK. While Swiss government debt yields remain low and inflation muted, we still think some allocation to government debt can make sense for adverse economic scenarios, in which government debt tends to rally and yields fall in anticipation of monetary easing.
Build a resilient fixed income core
While we have an overall bias for quality, we do not exclude holding some exposure to higher-beta segments such as emerging markets, high yield, or subordinated debt. Amid elevated geopolitical and sector-specific risks, investors should avoid overexposure to any single segment of the credit market. However, in the context of a well-diversified fixed income portfolio, an allocation to riskier credit can help improve overall returns.
Be selective in private credit and alternatives
Private credit remains a source of yield, but rising defaults in the lower-middle market and liquidity mismatches highlight the need for a focus on quality—senior secured, sponsor-backed loans in non-cyclical sectors are preferred. We expect further differentiation within private markets as refinancing pressures build and cross-asset correlations evolve. Diversification across private credit, hedge funds, private infrastructure, and real estate can help stabilize income and reduce portfolio volatility, particularly as traditional correlations shift. In our view, selectivity and ongoing due diligence are critical in navigating the current landscape.
