Over the last few months, sentiment about fixed income has flipped dramatically: from a favored investment destination that is deemed to benefit from exceptional support from central banks, to an asset class experiencing large outflows, negative returns and reduced standing as an anchor of a well-diversified asset allocation. Understanding well what created this change is critical to how investors may think about the future, including the role of fixed income as part of prudent investment portfolios that help generate returns and mitigate risk.

Tailwinds to headwinds
To illustrate the rapid changes in perceptions, consider where fixed income stood just a few months ago (at the end of April to be exact).

A diversified portfolio of high quality bonds, as defined by the widely followed Barclays U.S. Aggregate benchmark, had delivered strong returns over the last 20 years (Figure 1). The 1-,
3- and 5-year annualized returns stood at 3.6%, 5.4% and 5.6% respectively. For the 10-year period, it had generated an annualized return of 5.0%.