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How attractive is the yield environment today relative to recent history?

On a prospective basis, yields on high-quality fixed income look more attractive today than at nearly any point over the past 15 years.

Historically elevated yields chart illustrationFor much of the past decade, fixed income yields were exceptionally low by historical standards, held in check by Fed policy and low inflation. That changed dramatically over the past year, as surging inflation and the Fed’s aggressive rate tightening rapidly lifted yields. The resulting slippage in bond values last year may have dampened investor enthusiasm for fixed income, but the outlook for bond investors has dramatically improved as expected returns have risen.

As shown above, yields for both taxable and tax-exempt bonds are near their highest levels of the past 15 years. Increased yields raise expected returns over the long-term, improve their diversification benefits versus equities, and enhance the income-generation potential of a portfolio. Compared with just a few years ago, each of these benefits have become more pronounced as the yield curve has shifted higher.

It’s important to realize that not all fixed income investments are alike, nor are they all influenced by the same factors over the course of a cycle. Notably, despite their higher yields, credit sectors such as high-yield corporates don’t appear to be as attractively valued today, given the considerable uncertainty related to the economic outlook and potentially growing default risk that would almost certainly result in a widening in credit spreads, pushing yields upward. And while cash yields are also relatively attractive today, core bonds may deliver more compelling total returns over the next phase of the cycle as we discuss in our accompanying piece.

The bottom line? Despite last year’s disappointing returns, high-quality bonds are more attractive today than at almost any point over more than a decade. In time, credit will also have its proverbial day in the sun, but investors should be careful about reaching for yield in this environment.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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