In this article, we review:
- Why a flexible fixed-income strategy can invest across sectors, regions, currencies, and credit quality to enhance diversification and income potential
- The nature and breadth of bond markets, which are more diverse than many realize
- How active managers can exploit a complex market’s attributes and inefficiencies
For many investors, the known fixed-income universe tends to consist of Treasurys and other government securities, corporate bonds, and mortgage-backed securities — and not much else. But fixed income is much broader and more diverse than often perceived, encompassing a wide array of securities that may not be known to many individual investors. At a time when many investors are seeking income amid uncertainty about the direction of the economy and government policy, a flexible approach that aims to consistently deliver attractive income — while adapting to changing market conditions — may be especially compelling. Tapping the full breadth of the fixed-income markets can enhance opportunities to maximize income.
The past few years have been a rocky time for bond investors, especially after the Federal Reserve began a series of interest rate increases in March 2022 to combat rising inflation. The move appeared to mark the end of a decades-long bull market in fixed-income investments that had provided attractive total returns but resulted in unappealing current low yields. Since fixed-income prices move inversely with the direction of interest rates — that is, when prices go up, yields on fixed-income securities go down, and vice versa — prices of fixed-income securities dropped sharply in response to the Fed’s change of policy and higher long-term yields in 2022. This rattled investors who saw the value of their holdings decline and caused turmoil that extended into 2023, when markets settled into a “new normal” of higher interest rates.
The resultant re-elevated rates once again provide an attractive opportunity for current yield income across the spectrum of fixed-income assets. However, Treasury markets have remained volatile as investors contend with various potential sources of economic uncertainty (tariffs, inflation, employment, Fed policy) — and optimizing the outcome by actively managing across a broad spectrum of the global fixed-income opportunity set — can potentially improve risk-adjusted return while generating appealing income.
Despite such volatility, which can be unnerving to fixed-income investors seeking regular income, yields for many fixed-income asset classes are now considerably higher than their longer-term averages (see chart below). But finding opportunities for higher income can be a challenge, as fixed-income markets are often uncharted territory for investors familiar with Treasurys, core bond funds, and perhaps municipal bonds, but not much else.
While credit spreads have tightened, yields remain high relative to history
Source: Bloomberg as of March 5, 2025. US Aggregate yield-to-worst represented by the Bloomberg US Aggregate Index, USD Investment Grade Credit yield-to-worst represented by the Bloomberg US Credit Index, USD High Yield yield-to-worst represented by the Bloomberg US Corporate High Yield Index, US Leveraged Loans 3-year life yield represented by the Credit Suisse Leveraged Loan Index, EM Corporates yield-to-worst represented by the JP Morgan Corporate Emerging Markets Bond Index, and Asia Credit yield-to-worst represented by the JP Morgan Asia Credit Index. For illustrative purposes only.
Some segments of fixed income, however, are a bit less traveled and offer more attractive yields relative to their underlying credit and duration risk. Today, there are many bond funds specializing in various segments of the fixed-income market, including pockets and subsets of investment-grade and high-yield corporate and municipal bonds, mortgage-backed and other asset-backed securities, bank loans, and foreign corporate and government bonds. Some of these funds are passively managed, which means they aim for returns that track the performance of a benchmark for a specific type of investment, such as an index for U.S. Treasury bonds. Other funds are actively managed, which means their managers try to outperform a benchmark by applying their own research and making their own security selections.
In addition to publicly traded securities such as bonds, notes, and commercial paper that trade around the world, there’s a universe of non-publicly traded securities with a virtually infinite combination of maturities, ratings, and provisions that can affect performance.
Some active bond funds choose to forego being tied to a benchmark or a particular type of security in favor of a more flexible approach with the goal of selecting the most attractive income and total return opportunities. These funds are free to select, often globally, from the vast universe of fixed income securities — which is about three times as large as global equity markets — to meet the fund’s stated investment objective. A flexible approach also gives managers the freedom to invest defensively if they foresee a bear market and deem it prudent to act to preserve capital.
Observers have noted that fixed-income markets may be more conducive to active fund management than equity markets since, as a Morningstar® blog post noted, “The bond market’s structural diversity may present more opportunities for mispricing, which can be exploited by active managers.”1 This is mainly because fixed-income markets are still mostly traded over-the-counter rather than via exchanges. As a result, an imbalance of sellers or buyers for a security at a particular moment may move its price to a degree that may represent a very attractive buying or selling opportunity for active managers.
As of December 31, 2024. Returns derived from following: Three-month US T-Bill (Bloomberg Barclays US Treasury Bills TR USD); US Government Bond (Bloomberg Barclays US Government TR USD); US TIPS (Bloomberg Barclays US Treasury US TIPS TR USD); US Municipal (Bloomberg Barclays Municipal TR USD); US Inter Credit (Bloomberg Barclays US Intermediate Credit TR USD); US Long Credit (Bloomberg Barclays US Long Credit TR USD); CMBS (Bloomberg Barclays CMBS TR); MBS (Bloomberg Barclays US MBS TR USD); ABS (Bloomberg Barclays ABS TR USD); High Yield (Bloomberg Barclays US Corporate High Yield TR USD); Bank Loans (S&P/LSTA Leveraged Loan TR); EM Sovereign (JPM EMBI Global Diversified TR USD); EM Corporate (JPM CEMBI Broad Diversified TR USD); and EM Local Currency Debt (JPM GBI-EM Global Diversified TR USD).
[1] “The Strange Case of the Active Bond Fund,” Morningstar, November 11, 2024
Holding portfolios that are not wed to any particular asset class and can vary at the discretion of the fund manager may benefit investors, as the table above illustrates. It reveals that the fixed-income markets’ many asset classes produce a wide range of outcomes each year, with little consistency in any one asset’s relative return performance. In 2018, for example, three-month T-bills were the top performer, returning a hardly stunning 1.86%; in 2019 they returned 2.34% but were at the bottom of the chart, switching places with 2018’s worst-performing class, U.S. long credit, which went from a negative return (-6.76%) to a gain of 23.36%.
Performance in the most recent calendar year (2024) highlights the benefit of strategies pursuing consistently attractive yield or income and the advantage provided by relatively high all-in yields for many fixed income asset classes going into 2024. Yield or income can provide a cushion against Treasury rate volatility, and this became apparent last year, as most fixed income asset classes generated attractive total returns despite a significant fourth-quarter rise in Treasury rates (and decline in prices). With Treasury rate volatility likely to persist amid ongoing economic and geopolitical uncertainty, we believe maintaining an attractive portfolio yield or income will continue to provide an important buffer.
Managers of flexible funds, like all active managers, tend to have a deep understanding of market fundamentals — forces such as the direction of the economy and interest rates and the financial strength of individual issuers. Importantly, active managers also develop a sense of the market’s technical forces, especially supply and demand, which often significantly affect a fixed-income security’s price, and therefore its yield. Their knowledge and insights help them assess when conditions favor one asset class over another and when it may make sense to shift allocations.
Amid geopolitical question marks and uncertainty about where the economy and interest rates are headed, fixed-income investors seeking attractive current income may be less interested in the specific sector from which it’s derived and more interested in a quality portfolio that can deliver on this objective. If that’s the goal, a fixed-income approach that seeks value in all corners of the market may be worth exploring.
About the Author
Steven Oh is Global Head of Credit and Fixed Income for PineBridge Investments, where he is responsible for coordinating and overseeing the firm’s global credit and fixed-income strategies. He also serves as a portfolio manager for the Transamerica Strategic Income Bond Fund. A CFA® Charterholder, he received a Bachelor of Science in finance and management from the Wharton School at the University of Pennsylvania and an MBA in finance from the Kellogg School of Management at Northwestern University.
Related Funds
Index definitions
The Bloomberg US Aggregate Bond Index is an unmanaged index used as a general measure of market performance.
The Bloomberg US Credit Index measures the investment grade, USD-denominated, fixed-rate, taxable corporate and government-related bond markets.
The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market.
The Bloomberg US Treasury Bill Index tracks the market for treasury bills issued by the U.S. government.
The Bloomberg US Government Bond Index comprised of the U.S. Treasury and U.S. Agency Indices. The index includes USD-denominated, fixed-rate, nominal U.S. Treasurys and U.S. agency debentures (securities issued by U.S. government-owned or government-sponsored entities, and debt explicitly guaranteed by the U.S. government).
The Bloomberg US TIPS Index is a rules-based, market value weighted index that tracks inflation protected securities issued by the U.S. Treasury.
The Bloomberg US Intermediate Credit Index measures the investment-grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets with a maturity greater than one year and less than 10 years.
The Bloomberg US Long Credit Index measures the performance of investment-grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related debt with at least 10 years to maturity.
The Bloomberg US CMBS Investment Grade Index measures the market of U.S. Agency and U.S. Non-Agency conduit and fusion CMBS deals with a minimum current deal size of $300M.
The Bloomberg US Mortgage-Backed Securities (MBS) Index tracks fixed-rate agency mortgage-backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
The Bloomberg US ABS Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index only includes ABS securities.
The Bloomberg Municipal Bond Index is an unmanaged index considered representative of the broad market for investment-grade municipal bonds.
The Credit Suisse Leveraged Loan Index tracks the investable market of the U.S. dollar-denominated leveraged loan market.
The J.P. Morgan Corporate Emerging Markets Bond Index tracks USD-denominated debt issued by emerging market corporations.
The J.P. Morgan Asia Credit Index is an all-inclusive benchmark that tracks liquid, U.S.-dollar denominated debt instruments issued out of the Asia ex-Japan region.
The J.P. Morgan EMBI Global Diversified Index tracks liquid, U.S. Dollar emerging market fixed and floating-rate debt instruments issued by sovereign and quasi-sovereign entities.
The J.P. Morgan CEMBI Broad Diversified Core Index tracks the performance of U.S. dollar-denominated bonds issued by emerging market corporate entities.
The S&P/LSTA Leveraged Loan Index is a market-value weighted index designed to measure the performance of the U.S. leveraged loan market.
Important information
All opinions, estimates, projections, and security selections contained herein are those of the sub-adviser. It does not constitute investment advice and should not be used as a basis for any investment decision.
Comments and general market-related projections are based on information available at the time of writing and believed to be accurate; are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for future investing. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions. The value of any investment may fluctuate.
Mutual funds are subject to market risk, including loss of principal. Past performance is not indicative of future results.
Mutual funds are sold by prospectus. Before investing, consider the funds' investment objectives, risks, charges, and expenses. This and other important information is contained in the prospectus. Please visit transamerica.com or contact your financial professional to obtain a prospectus or, if available, a summary prospectus containing this information. Please read it carefully before investing.
Fixed income securities and, therefore, the fund, are subject to risks including credit risk, interest rate fluctuation risk, counterparty default risk, which is greater with respect to high-yield/non-investment grade bonds, prepayment risk, extension risk, valuation risk, and liquidity risk. Changes in interest rates, the market's perception of the issuers and the creditworthiness of the issuers may significantly affect the value of a bond. Using derivatives exposes the fund to additional or heightened risks, including leverage risk, liquidity risk, valuation risk, market risk, counterparty risk, and credit risk.
Transamerica Companies and PineBridge Investments are not affiliated companies.
Transamerica Funds are advised by Transamerica Asset Management, Inc. (TAM) and distributed by Transamerica Capital, LLC, member FINRA.
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