Bond yields have risen…and so has my optimism

Historically low bond yields have quickly become little more than a distant memory, says Fidelity’s Jeff Moore.

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Amid a backdrop of persistently high inflation and rising interest rates, the bond market experienced one of its toughest years ever in 2022, according to Fidelity’s Jeff Moore.

“With that sharp downturn, however, in early 2023 we are feeling better than we have in years about the prospects for bonds,” says Moore, co-manager of Fidelity® Investment Grade Bond (FBNDX), alongside Michael Plage.

The main reason behind their optimism is that as bond prices have fallen and corresponding yields have moved higher, the asset class is the most attractive it’s been in a long time, Moore points out.

For example, the fund’s benchmark, the Bloomberg U.S. Aggregate Bond Index, yielded 1.42% on February 26, 2021. Fast-forward two years to February 28, 2023, and that yield had risen to 4.81%, Moore highlights.

The co-managers’ investment strategy relies on a team-based approach that leverages the capabilities of experienced portfolio managers, research analysts, and traders. Moore and Plage focus on areas of the bond market where they believe they can repeatedly add value, primarily through asset allocation, sector and security selection, yield-curve positioning, and opportunistic trading.

With today’s higher yields, Moore believes he and Plage have more paths to capital gains than in the recent past.

Accordingly, they have slowly and methodically added to both the fund’s duration, a key measure of interest rate sensitivity, and credit risk within the portfolio.

“Yield can actually protect the fund from a lot of market volatility,” Moore explains. “So, the more yield we can put into the portfolio—within the confines our risk tolerance parameters, of course—the greater the fund’s potential to perform well through what is still a challenging and often volatile investment environment.”

The co-managers stress that they and other bond investors may have to endure these conditions for some time, and that any potential gains could be gradual.

Over the longer term, though, Moore and Plage are hopeful the bond market could offer some particularly attractive investment opportunities, especially relative to the past several years.

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