Diversify Bond Portfolios To Prepare For Coming Changes In The Fixed-Income Market, Fidelity Urges
Today’s low rates not only limit short-term income, they also limit a bond portfolio’s potential to go up in the future. Combine that with the growing threat of higher inflation and it becomes vital for investors to diversify beyond high-quality bonds.
Fidelity is recommending that investors add a mix of high-yield and foreign bonds to their high-quality bond portfolio.
“Complementing high-quality bonds with a variety of other sectors can help you increase your yield and return potential while protecting against risks such as potentially higher inflation,” says Dirk Hofschire, Fidelity senior vice president of asset allocation research.
Different types of bonds respond in different ways to particular risks. For example, U.S., Asian, and European high-yield bonds all had negative correlations with U.S. government bonds between 1998 and Sept. 30, 2011, as did leveraged loans.
While inflation is not a given, uncertainty over the future direction of the world economy argues in favor of diversification, Hofschire says.
In a recent study, Fidelity examined the yield-to-maturity of various sectors as a proxy for expected returns. They found that, at a variety of risk levels, a diversified portfolio offered higher expected risk-adjusted returns than a portfolio of only U.S. high-quality securities.