SUMMARY
Favoring shorter-duration, high-quality bonds to complement core equity allocations
Key Takeaways:
Fixed income yields are near 15-year highs, offering compelling carry and a buffer against rising rates.
Strong Q3 earnings suggest another quarter of robust profit growth.
We continue to favor short-date high-quality bonds over longer-duration and lower-quality exposure.
In our view, pairing these bonds with existing equity allocations may help investors pursue both income and growth.
High starting yields offer carry and a potential cushion against rates
Income remains one of the most common objectives we discuss, alongside growth and diversification. Many investors hold elevated cash balances or prefer a conservative risk profile, and both groups may now find compelling potential opportunities in fixed income. As of October 14, U.S. municipal bonds, 10-year U.S. Treasuries, and the Global Aggregate Index all sit at the 100th percentile of their 15-year yield ranges, even as credit spreads remain compressed.
Starting yield matters because it locks in a meaningful portion of a bond’s total return. From 2000-2025, the Bloomberg Global Aggregate Index’s starting yield explained much of the variation in its three-year annualized forward return, with an R² of 0.681[1].
Higher yields also give investors a larger buffer against rising rates. Yields on one- to three-year U.S. investment grade (IG) bonds would need to climb roughly 296 basis points to erase a year of returns, compared with 269 basis points for U.S. high yield (HY) and just 65 basis points for ten-year Treasuries. Short-dated IG offers more cushion than HY without the added credit risk.
We assess these potential opportunities through a multi-asset lens. Although securitized debt screens cheaply, we recently trimmed our securitized allocation in favor of equities. We also believe central banks may not have finished raising rates, so bonds could cheapen further from here.
BOTTOM LINE: Yields across much of fixed income sit near multi-year highs, offering attractive carry and a larger buffer against rising rates. We continue to favor short-dated, high-quality bonds over longer-duration and lower-quality exposure.
Tailoring fixed income portfolios for yield and risk
Not all yields are equal, and every investor brings a different comfort level with credit risk, duration, and liquidity.
We believe a customized fixed income allocation can serve investors better than a one-size-fits-all approach. Portfolio construction tools can help investors seek the most yield for each unit of volatility they accept.
BOTTOM LINE: Every investor should consider a fixed income allocation that reflects their own yield, risk, and liquidity priorities. We believe a tailored approach may help investors improve income per unit of volatility.
Q3 earnings reinforce our constructive outlook
Q3 reporting season opened on solid footing. With 9% of S&P 500 companies reporting, 84% beat estimates, and the blended earnings growth rate stands at 27%, with blended revenue growth of 12%. If that pace holds, it will mark a third straight quarter of earnings growth above 25% and an eighth consecutive quarter of double-digit growth. The bar sits higher, however: the aggregate earnings surprise of 2.6% trails the five-year average of 7.5%.
Large U.S. banks offered an early read on credit quality, and the results looked healthy. Credit appears to be normalizing rather than deteriorating, and credit card charge-off rates improved across several major lenders. Banks also flagged higher interest rates and sticky inflation as key risks, just weeks after the U.S. Federal Reserve raised its policy rate by a quarter point to a 3.75% to 4% range in September.
Results from the AI supply chain support one of our core structural themes. AI earnings so far this quarter look strong and demand for AI-related chips continues to exceed the ability to supply them. AI demand now extends beyond accelerators into processors and networking chips. Even so, investors rotated out of Technology last week, which reinforces our focus on quality and diversification. We’re closely watching results from this earnings season given our fundamentals-driven approach.
Earnings leadership also continues to broaden. Energy now leads expected earnings growth, reflecting higher oil prices, as the median S&P 500 energy stock is growing EPS by 34%. Tech comes in second at 31% and Industrials third at 20%. This dispersion supports our selective approach and conviction in themes like energy infrastructure and security, cybersecurity, and physical AI and automation.
The test continues this week, as more than 70 S&P 500 companies report. We are monitoring AI spending, cash flow, consumer demand, and profit margins as higher rates take hold.
BOTTOM LINE: Early results point to another quarter of strong profit growth, supported by AI-related demand, higher energy prices, and resilient consumers. We believe solid earnings support our structural themes.
[1] R2 is a statistical measure that tells you how well an independent variable (starting yield) explains the variation in a dependent variable (3yr annualized forward return).
