In an era of low yields, generating income has been a challenge for many investors, with attractive yields limited to a narrow range of asset classes. That landscape has improved somewhat since early 2022, with inflation, geopolitical tensions and hawkish global monetary policies driving up yields across a wider-than-usual swath of investment types.
Generally higher yields expand the range of attractive income sources for multi-asset investors, giving them more flexibility to diversify their income sources and reduce the risk from overexposure to just one or two higher-yielding assets.
For example, the yield on emerging-market (EM) debt sharply rose about 1.6% in the first quarter of 2022. Now at 6.4%, it’s near the top end of its 10-year range (Display). But chasing just the best-yielding option can be a risky proposition at any time, let alone amid the unique challenges of the current market.
Instead, investors need to stay dynamic and look to the horizon to navigate possible stormy seas ahead. EM debt may seem like the most attractive destination to date, but it’s not prudent to go all in. Yields on high-yield credit and global investment-grade bonds are up to a solid 6% and 3%, respectively, compared to 4% and 2% at year-end 2021. At these levels, both complement EM debt very well. And investors who remain selective will also find many of these corporates backed by strong issuer fundamentals, making them even more appealing from a risk-reward perspective.
It’s important to diversify—whether across a broad portfolio of equities, bonds and real assets, or within a smaller cohort of investments focused on a singular goal, like income. And with yields up, or at least holding steady, across income-producing assets from REITs to dividend-paying stocks, multi-asset investors now have more tools to do that.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.