The Takeaway
Today’s bond market doesn’t just look appealing – it could offer the opportunity for positive outcomes. That’s because income levels are now high enough to cushion most declines.
Munoz offers an example of this bond math in action: When yields are 4%, that means an investor earns 4% in income over 12 months. If yields rise by 1%, bond prices might fall 6%. Subtract the 4% income, and you’re left with a 2% loss – a manageable downside risk. But if yields fall by 1%, prices could climb 6%. Add 4% income, and you’re up 10%.
“That’s a really good risk-reward,” says Munoz. “The fact that such a big portion of your return is driven by income right now makes the bond market really attractive.”
Capturing this opportunity requires more than just showing up. In a fragmented, inefficient market with millions of securities, timely execution matters as much as opportunity.
This is where active management is designed to deliver an edge. Passive investing waits until upgrades are official – often after the price move has already happened. Active managers, by contrast, can act on early signals, purchase bonds with strong fundamentals and avoid issuers weighed down by excessive debt.
“We’re actually looking for the stone that hasn’t been overturned, picked up, and looked at,” says Cullen.
In an opaque, negotiated market that trades over the counter, Fidelity’s team-based approach – grounded in research and trading expertise, as well as global scale – gives their managers the opportunity to exploit inefficiencies others can’t. With in-depth analysis and the flexibility to go beyond the benchmark, they can target securities that look like the index, but with greater return potential.
It’s here – in the 53% of the fixed income market not covered by the benchmarks – where true alpha may be found.
Created by Fidelity and Bloomberg Media Studios.
