What’s on Our Minds

Intermediate-duration bonds offer an attractive asymmetric payoff because higher starting yields now provide meaningful income and protection against further rate increases.

• The Bloomberg US Aggregate Index has returned roughly 0% over the past five years as bond markets adjusted away from the post–Global Financial Crisis zero-interest-rate environment.
• The index currently yields about 5.5%, creating a larger income cushion than during the period of near-zero rates.
• If yields rise another 1% from current levels, the index’s income and price losses would roughly offset after one year, leaving total returns approximately flat.
• If yields fall 1%, the index could generate a double-digit total return over the following year, although the analysis excludes potential credit losses and changes in credit spreads.

Takeaway: Investors should consider intermediate-duration fixed income for its solid income and favorable rate asymmetry, while recognizing that the timing of the peak in rates remains uncertain.