Take the lead: Investing for yield in a low-rate environment

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Advisors: Encourage your clients to make the necessary adjustments as the interest rate environment changes.

The background

Short- and long-term interest rates around the world are historically low. Today’s rate environment is partly explained by central bank policies, a long period of secular disinflation and, more recently, slower global growth in major economic regions. A low-rate environment presents challenges for investors, especially those who are trying to generate a reasonable level of consistent income.

How investors can approach low interest-rate environments

  • You should expect some volatility to earn returns on your capital.

With lower yields, it’s harder to meet income or return targets without taking on more risk, such as extending maturity or investing in lower quality bonds. We believe the best starting point is selecting the risk factors an investor wants exposure to and then choosing the appropriate types of instruments.

  • Expand your horizons and consider a flexible approach to allocating among assets.

Historically, investors could rely on U.S. Treasuries to provide sufficient income. But in a low-rate environment, investors will have to consider a wider opportunity set that includes non-traditional sources of income such as structured assets. Remaining flexible allows investors to pivot toward more attractive sectors of the diverse fixed-income universe as conditions change over time.

  • Consider the benefit of Treasuries beyond yield.

Treasuries can still provide effective portfolio protection from negative shocks to risk assets and are also a critical source of portfolio liquidity during periods of market stress.

  • Make sure the reward that comes with reaching for yield is commensurate with the risk.

Simply picking the highest yielding securities may leave an investor vulnerable to market downturns. Instead, try to diversify across fixed-income asset classes and risk factors. This approach to asset allocation may deliver more consistent levels of income and help mitigate risk during market downturns.