Why Fixed Income is Attractive for Investors Moving Out of Cash

Kenneth Orchard, CFA Head of International Fixed Income 
Vincent Chung, CFA Portfolio Manager, Global Fixed Income

Key Insights

• There is an opportunity cost to staying parked in cash over a prolonged period of time as it could mean missing out on capital appreciation opportunities elsewhere. 
• Against this backdrop, we believe it is time for investors to consider redeploying cash. And with bond yields at elevated levels, fixed income offers an attractive opportunity to lock in income.
• A global multi‑sector approach is particularly appealing in the current environment, in our view, as it has the ability to invest across a broad range of sectors to find the most attractive opportunities and diversify return sources.

For several years now, cash has been king. But there is an opportunity cost to staying parked in cash—missing out on capital appreciation opportunities elsewhere. With this in mind, we think it is time for investors to consider redeploying cash. But where? With bond yields still at elevated levels, we believe that fixed income is an attractive asset class for putting cash to work—especially for investors seeking to lock in income. 

In this first installment of a three‑part series on fixed income, we’re delving into why investors should consider redeploying their cash into bond markets. 

Why we believe it’s time to step out of cash 

Market uncertainty and elevated short‑term interest rates have led to a record amount of money being held in money market funds. However, last year marked the beginning of interest rate cuts by developed market central banks, causing cash rates to come down from their peaks. Despite this, these rates remain high compared with much of the post‑financial crisis era, prompting many investors to remain in cash. 

Looking ahead, the future direction of cash rates is uncertain. But regardless of where cash rates go from here, we believe it is not an optimal strategy to stay parked in cash, particularly over a medium‑ to long‑term horizon, as it could mean missing out on potentially higher‑yielding investment opportunities elsewhere.  

The case for fixed income 

With bond yields still at elevated levels relative to much of the post‑global financial crisis recovery, we believe fixed income presents an attractive opportunity for investors. Beyond its income generation potential, fixed income offers investors diverse sector options that support a range of goals and risk tolerances, providing opportunities for both defense and capital appreciation. The fragmented nature of this asset class means that what drives one sector of the market is different from what drives another. This provides flexibility to choose sectors that suit distinct needs, such as generating consistent income, capital appreciation, or defense against equity market volatility.

In recent years, fixed income and equity markets have tended to move in tandem. This understandably raises questions about whether bonds can still deliver the benefits of diversification seen historically. Going forward, correlations between the asset classes could continue to be volatile. However, if an extreme market event or significant downturn puts major selling pressure on risk assets such as equities, we expect high‑quality government bonds to be effective diversifiers. At a minimum, they should provide longer‑term investors with potential liquidity—therefore, optionality—needed to make portfolio adjustments in times of stress.

The combination of political uncertainty, high fiscal deficits, and geopolitical risks, alongside diverging global growth and monetary policies, may be unsettling for some investors—keeping many parked in cash. However, with bond yields still at elevated levels, it is time to consider redeploying those cash assets to potentially lock in income at these attractive levels. In particular, a global multi‑sector bond approach may be conducive in the current environment as it has the ability to invest across a wide variety of fixed income sectors, including government, corporate, and securitized debt—both investment‑grade and high yield issues—across developed and emerging markets. This offers the potential to diversify return sources, which may appeal to investors seeking a stable return and lower volatility through diversification. In our next installment of the series, we will delve deeper into this approach and explore the potential benefits for investors.

"...with bond yields still at elevated levels, it is time to consider redeploying those cash assets to potentially lock in income at these attractive levels.

– Kenneth Orchard, CFA 
Head of International Fixed Income

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