The United States appears to be at the tail end of a multi decade long period of falling interest rates that dates back to 1982. These falling interest rates have helped fixed income investors by providing attractive returns with low volatility. Hence, this has been a great vehicle for meeting investor income needs.
However, over the past several years interest rates have fallen to such low levels that these same investors have been forced into riskier areas of the financial markets to help meet their income needs. Those who have remained in fixed income, and have resisted the urge to add risk for more income, might now find themselves in a situation where they begin to lose principal. Investors who cannot wait for their bonds to mature (especially long term bond holders) might find themselves in a situation of having to sell their bonds at much lower prices.
We continue to feel that interest rates will rise over the next few years. We believe the best approach in this new environment may be a higher allocation to non-traditional fixed income that has a more flexible mandate. That being said, looking forward we do think that returns in the fixed income space will be low and potentially even negative should we see interest rates rise faster than the market anticipates.