We view fixed income as Attractive, with opportunities across regions and market segments. In high-quality bonds, investors can consider adding exposure to the medium- to long-term maturity range, where we believe yields provide income, potential price gains if growth slows, and portfolio diversification. Emerging market bonds also offer appealing yields and diversified return potential.
Stronger investment grade issuers, meanwhile, offer attractive carry across medium maturities, in our view, while higher-risk credit should remain relatively short-dated. We remain cautious on the longest maturities given fiscal concerns and rising AI-related issuance. Investors should calibrate credit and duration risk to their objectives. For example, more income-focused investors may prefer shorter maturities to reduce duration risk. In Switzerland, diversified income sources remain especially important.
Add medium- to long-duration high-quality bonds
The recent rise in yields has created tactical opportunities to add some duration in high-quality bonds. Medium- to long-duration high-quality bonds have scope for price gains and can provide valuable diversification. Alongside attractive income, these securities may appreciate if tighter monetary policy slows growth or reduces longer-term inflation expectations, leading yields to decline.
Investors should remain selective. We are more cautious on the longest-dated bonds, given fiscal sustainability concerns, growing AI-related debt issuance, and the potential for term premiums to remain elevated. In credit, stronger investment grade issuers offer attractive carry across medium maturities. More income-focused investors may prefer shorter maturities to reduce sensitivity to changes in interest rates.
Seek appealing income and diversification through emerging market bonds
Emerging market credit offers an attractive source of risk-adjusted returns within global fixed income, in our view. The asset class benefits from a compelling combination of attractive carry, supportive technicals, and resilient fundamentals. Many sovereign borrowers have strengthened their external balances, while corporate issuers generally maintain conservative leverage and solid earnings momentum.
Current yield levels offer an attractive income cushion, while stable credit metrics and robust investor demand should continue to support valuations. Emerging market bonds can therefore complement high-quality developed-market exposure and broaden the drivers of portfolio income. But investors should remain diversified and avoid overexposure to any single country, issuer, or segment. As emerging market credit carries greater credit and market risk, relatively short-dated exposure may help limit the combined sensitivity to credit spreads and interest rates.
Consider rate-linked income opportunities
Shifting monetary policy expectations and elevated interest rate volatility can create opportunities for investors to consider income strategies whose returns are linked to the level or path of interest rates. Such strategies may complement conventional bond exposure and help investors seek income in an environment where policy rates and bond yields could remain volatile.
The appropriate approach will depend on an investor’s objectives, investment horizon, liquidity needs, and capacity to bear risk. Investors should understand that income may depend on specified interest rate conditions and that structures can involve limitations, complexity, liquidity constraints, and issuer-credit risk. Rate-linked strategies should therefore form part of a diversified income allocation rather than replace core high-quality bond exposure.
Diversify income sources for Swiss franc investors
For investors in Switzerland, diversified income sources remain important. Lower yields in the domestic bond market can make it harder to meet income objectives using Swiss franc bonds alone. Investors can consider combining highly rated Swiss corporate bonds with global fixed income, emerging market bonds, selected credit, rate-linked strategies, and equity income.
Quality dividend equities focus on companies that pay higher dividends while displaying attributes such as strong free cash flow generation or high returns on equity. They tend to be found in more defensive parts of the market, and history suggests that dividend payments may prove relatively stable during an economic downturn.
We particularly like Swiss dividend-paying equities. Their average dividend yield of around 3% is above both the historical average of 2.4% since 2004 and the yields available on highly rated Swiss franc bonds. Over the past three decades, dividends have accounted for more than half of the SMI’s total return. Balance sheets and profitability are generally robust, in our view, suggesting that market-wide distributions are sustainable despite risks to corporate profits from weaker economic prospects.
Currency risk can be a larger contributor to fixed-income returns than in other asset classes. Swiss investors adding international bonds should therefore align their holdings with their overall currency strategy, using an appropriate mix of currency-hedged funds, local bonds, and international bonds. Diversifying across asset classes and income sources can help investors seek more durable income without relying excessively on any single market outcome.
