The past few years have seen some tougher times for folks who invest in government bonds and other fixed-income assets – with rising inflation and aggressive interest rate hikes taking their toll. Fast-forward to today, however, and the backdrop for these investments looks a lot more promising.

Global inflation is mostly under control, and most major central banks have started to reduce interest rates. And though many economies have seen economic growth slow a bit, there’s no reason to expect widespread recessions. Meanwhile, yields on fixed-income assets are relatively high compared to the past few years – which may offer an attractive entry point into the asset class. So you might therefore expect positive total returns. Let’s take a look.

What are current market conditions and risks?

The market’s reaction to the US election has been mostly as anticipated: US Treasury yields have ticked higher as investors price in the potential impact of the president-elect's policy agenda. Corporate profitability has been robust and is likely to stay that way – and that’s been one of the factors compressing credit spreads across investment-grade and high-yield bonds.

A look inside the books suggests that corporate fundamentals are still brawny – with leverage and interest coverage ratios at comfortable levels, indicating investors are being adequately compensated for taking on credit risk. Credit agencies largely agree: they’re forecasting a relatively benign default environment. That said, you might want to approach lower-rated high-yield bonds with more caution.

The main risks to the status quo come from the mix of policies that the new White House might implement. The primary concern is that higher tariffs and reduced migration could lead to a resurgence of inflation. That could, in turn, compel the Federal Reserve (Fed) to adjust its plans for interest rate cuts. Additionally, it could stifle the economic growth prospects of some US trading partners – leading some countries to slash their interest rates while others hike.

How might investors access the fixed-income story?

Bond investors want to achieve a compelling yield in a risk-controlled manner – especially as the return on cash deposits begins to fall. This includes the short-dated enhanced income strategy, which can aim to generate excess returns relative to cash while providing some good liquidity.

In this space, it might make sense to concentrate on high-quality, short-term bonds, commercial paper, and other fixed-income instruments with maturities that are generally under a year. It’s a good fit if your goal is to minimize interest rate and credit risks to ensure a stable return profile, particularly regarding potential drawdown risks. Additionally, this strategy offers potential diversification within a fixed-income portfolio, with more effective balancing of risk and return.

Where are the sweet spots in the bond universe?

The first step to achieving specific outcomes is identifying bonds that provide reliable income and resilience across various market conditions.

A long-term analysis of credit markets shows that combining BBB-rated bonds (the lowest investment-grade rating) and BB ones (the highest high-yield rating) consistently offers the best risk-adjusted outcomes. And that can be captured in a global income bond strategy. Investors who concentrate on strategies managed against traditional credit benchmarks often overlook and underappreciate this section of the market. But, structurally, a global approach can provide some serious benefits – including high-yield-like returns, with investment-grade-type risk.

When combined with some disciplined bottom-up credit research, global income bonds can be an attractive way to go.

If green is your thing: sustainable bonds, particularly those focusing on climate transition, present a forward-looking investment opportunity. Many climate-related products concentrate on the portfolio’s appearance, such as emission targets or green bond labels. But it makes sense to prioritize real-world decarbonization and adaptation instead. By identifying major emission sources across sectors like energy, transport, materials, real estate, and industrials, you can target companies with sturdy, credible plans to reduce emissions.

That can help you capitalize on multi-decade climate initiatives while hunting attractive returns with a focus on a tangible environmental impact.

What’s the big takeaway then?

There’s currently more than $6 trillion sitting on the sidelines of the investment world. And fixed-income assets right now are offering a compelling case for that money to jump in. Interest rates are expected to head lower, which would push bond prices higher. Although economies have slowed, they appear to be headed for a recession-free “soft landing” – particularly in the US. Lastly, while we don’t expect any huge-scale defaults, careful asset selection is important: it can help you avoid underperforming securities and industries.