Breakdown of Barclays Agg total returns over time
Source: Bloomberg Finance, L.P., as of September 22, 2021. Barclays Agg refers to the Bloomberg Barclays U.S. Aggregate Bond Index.
- The Federal Reserve largely stayed on script at its meeting this week, taking no action but guiding markets for pending activity as Fed Chair Powell all but announced in his post-meeting press conference that the Fed will begin tapering asset purchases in early November. If the Fed delivered a surprise, it may have been a slightly hawkish one in that it expedited the anticipated pace of tapering.
- While policymakers have left the exact timing for an interest rate “liftoff” up in the air, they have clearly guided markets in their past several meetings that rate hikes are on the way. The Fed’s gradual shift toward a less-accommodative monetary stance could have a range of impacts on markets, yet fixed income investors could be among those who feel the greatest impact.
- The chart shows total returns for the Barclays Agg, broken out by income and price return, over the past three years. As it highlights, the amount of income generated by core fixed income has steadily declined, a trend that has in fact been in place over the past several decades. YTD the Agg has provided just 1.0% in income.1 Over the previous two years, however, core fixed income saw significant price gains as interest rates plummeted and remained near their historical lows. As the chart shows, these price gains were enough to more than offset the income declines.1
- With the Fed guiding markets to an eventual “liftoff,” fixed income investors remain stuck between a rock and a hard place. Traditional fixed income portfolios face significant downside risk if rates move higher but continue to offer little upside if they trade sideways or decline again.
- Against this backdrop, the case for alternative sources of income to fill the role that traditional fixed income investments once did continues to grow.