Ask yourself: how do you think you’d respond to any investment product quoting a yield of at least 10%?, stated thestreet.com.

Off the top of your head, umm…okay, sure? Well, okay, that might be because, to capture a nosebleed level like that, usually, the fund’s rife with risk or the yield’s not sustainable.

Reasonably speaking, the highest yield you can reach on the fixed income side stems from junk bonds. Currently, the iShares High Yield Corporate Bond ETF chimes at approximately 8%.

Meantime, looking north, for this cycle, Canadian interest rate are looking at their high. What’s more, given the reopening boom and rate hike cycle are, by in large, in the rearview mirror, the time’s optimal to peak again at fixed income allocations, according to privatewealth-insights.bmo.com.

When inflation’s less than 3%, the top 15 industries are nearly all cyclical. Not long ago, Canada’s Consumer Price Index receded below that level. In the aftermath of a Fed pause, multiple sectors and, as a whole, the market, tends to perform well six and 12 months afterwards.

Save the risky business for the movies.

With little risk linked to it, active fixed income is one reason investors are attracted to it, according to assetnvesting.net.

What’s the scoop here? Well, it guarantees the capital of investors and reduces --  and not just a little – the insecurity that it can dispense in the event that if, for one thing, an equity investment’s opted for.

It doesn’t stop there. Additionally, the fixed income shells out a return. While it might not be robust when weighed against other investments, it boasts a reputation ahead of time. That matters since, because of it, investors are positioned to previously know the results it will secure. For conservative investors, it’s what they opt for first.

And talk about versatility. Tactical responses to a cocktail of market climates and shifts in regimes are facilitated by an active approach, according to troweprice.com. On top of that, it dishes out the flexibility to leverage pricing anomalies and dislocations that a volatile climate might generate. Additionally, curve positioning could be a good idea to mull.

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In a piece for AdvisorEdge, James Langton discusses how banks are tightening their lending standards which could present an opportunity for alternative investment managers. According to a report by Fitch Ratings, there is a surge in interest for private debt from borrowers. In North America, private credit funds’ assets under management increased from $242.7 billion in 2010 to over $1 billion at the start of the year. 

And, this trend should only accelerate in the coming years especially as regional banks are a key source of funding, and many are struggling with an inverted yield curve. The crisis in regional banks earlier this year underscored their perilous position. Thus, it’s not surprising to see a flurry of new private credit funds. In the second quarter, 34 new funds were launched, raising $71.2 billion, more than double what was raised in the first quarter. 

Private credit is more insulated from rising rates due to its reliance on floating rate-loans. Additionally, default rates have remained at historically low levels at 1.6% in Q2 and 2.2% in Q1, indicating that the overall economy remains resilient and rewarding investors in these funds. 

Finsum: Funding from banks is increasingly difficult to access given tighter credit standards and challenges for regional banks. This is creating an opportunity for alternative investment managers as private credit funds step into the void.

The first-half of the year saw the energy sector underperform due to various headwinds such as the crisis in regional banks, concerns of a recession, high rates, tight monetary policy, stubborn inflation, etc. The second-half of the year has seen energy outperform as economic data continues to come stronger than expected and inflation has moderated, leading to more confidence that a soft landing outcome is likely.

For instance, crude oil started the year at around $80 per barrel but spent most of the first-half, trading between $60 and $70. In the second-half of the year, oil has traded between $70 and $80 for the most part. 

In terms of the outlook for crude oil for the rest of the year, the major bullish catalysts are reduced output due to OPEC+ cuts while demand should remain resilient especially if a recession is avoided. However, there is a bearish catalyst on the horizon due to increasing concerns that China could already be in a recession. 

Recent data coming out of the country has been quite poor. This has been underscored by the 8.5% decline in property investments and defaults from some high-profile developers. Retail sales data also missed badly at 2.5% growth vs expectations of 5.3%. Another concerning datapoint is the 14.5% decline in the country’s exports. These trends could undermine the nascent rally in crude oil given that it’s a major source of demand.

Finsum: Crude oil prices have enjoyed a nice rally in the second-half of the year, however a weakening Chinese economy could result in the rally fizzling out. 

Although 2022 was the worst year for bonds in recent history, there are some silver linings for fixed income investors according to WisdomTree’s Andrew Okrongly and Behnood Noei who are the firm’s director of model portfolios and fixed income, respectively. These are the highest yields in decades which is bringing ‘income back to fixed income portfolios’ and the potential for significant returns. The second is reduced duration risk given that short-term bonds are offering generous yields.

The current environment is significantly different from what prevailed for much of the last 2 decades when bonds both trended higher with minimal volatility. However, the asset class became less appealing due to higher levels of duration risk in addition to miniscule yields. As a consequence, many fixed income investors went further out on the risk curve to find yield whether it was junk bonds, EM debt, or dividend-paying stocks. 

Now, investors can find much higher levels of yield with much less risk. Therefore, fixed income can return to its traditional role of providing income and safety in portfolios. In fact, it’s a rare circumstance that shorter-term bonds are offering much higher yields than longer-term bonds with less risk. And, these conditions should persist given current Fed policy and the economy’s resilience. 

Finsum: Investors should consider short-duration fixed income model portfolios given that they are offering higher yields with less duration risk.