OppenheimerFunds’ CIO Krishna Memani believes that continued easy monetary policy, slow nominal growth and high demand for income-producing assets will keep interest rates low for the foreseeable future.
In a low rate world, real income—rather than capital gains—would likely be the primary driver of future returns for fixed income investors looking beyond traditional sources of yield such as U.S. Treasuries, government-agency bonds, mortgage-backed securities and long-term, investment-grade corporate bonds.
Investors seeking the potential for attractive yields and higher returns in a prolonged low rate environment may want to consider:
- Limited-term bonds, which have had similar risk-adjusted yields to those of a traditional fixed income portfolio but with lower interest-rate sensitivity
- Senior loans, which may provide solid risk-adjusted yields with historically low correlations to other fixed income asset classes.
Fixed income investing entails duration, credit and interest rate risks. Interest rate risk is the risk that rising interest rates or an expectation of rising interest rates in the near future will cause the values of a fund’s investments to decline. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Senior loans are typically lower-rated and may be illiquid investments (which may not have a ready market). Diversification does not guarantee profit or protect against loss.