For the first time in nearly a generation, fixed income investments are truly living up to their name.
This change is largely due to benchmark rates in the US rising from 0% to over 5% in just two years.
Amid the current focus on whether the Federal Reserve will cut interest rates this year and debates over specific yield levels, it's important to remember that US Treasuries are returning to their traditional role in the economy. They are becoming a dependable source of income that investors can rely on, regardless of short-term fluctuations in yields.
Last year, investors received nearly $900 billion in annual interest from US government debt, double the average of the previous decade. This amount is expected to increase as almost all Treasuries now offer yields of 4% or more. In contrast, in mid-2020, none did. This higher interest also provides investors with better protection against potential yield increases. Currently, rates would need to rise by over three-quarters of a percentage point over the next year before Treasuries start to lose value, at least on paper.
"Income is back in fixed income, thanks in part to the Federal Reserve," said Anne Walsh, chief investment officer of Guggenheim Partners Investment Management. "Fixed-income investors now get to enjoy the benefits of higher yields. That's a positive development."
Two recent economic trends have contributed to this situation. First, progress toward the Fed's 2% inflation goal has stalled, pushing out expectations for rate cuts. Second, despite some signs of cooling in the labor market, the economy continues to perform well, suggesting the Fed may not need to lower rates significantly when it does act.
As a result, safe assets like Treasuries are now attractive to those seeking income. Money-market funds and bond funds have seen significant inflows, and the amount of debt held by households and non-profits has surged to a record $5.7 trillion.
The reset in yields for high-quality debt is expected to have broad implications across financial markets, affecting buyout firms, hedge-fund managers, and private-credit shops that attracted significant investments when rates were at historic lows.
