For investors who have historically relied on fixed income for diversification and liquidity, the asset class is a much less compelling proposition today than it used to be. The diversification benefits of the asset class is coming in at a higher cost in terms of returns foregone. We also believe it is much less likely to provide investors with what they need in times of market stress. Simply put, the risk-to-reward ratio is poor.
Interest rates have continued to fall even as debt levels have increased. Central banks have become very accommodating at every turn of the business cycle. This addiction to central bank stimulus and reliance on easy financial conditions is severe. One of the outcomes is that fixed-income assets do not offer the same downside protection as they once did9 July 2020