Fixed income has historically served as a portfolio’s ballast—providing stability, predictable income, and downside protection during equity drawdowns.
But that traditional role is now being redefined. Advisors can no longer assume that bonds automatically lower portfolio risk. Instead, as market dynamics evolve, fixed-income strategies must evolve with them.
The catalyst? A confluence of macro pressures: the Federal Reserve’s higher-for-longer stance on interest rates, persistent inflation, rising geopolitical tensions, and a ballooning U.S. fiscal deficit—all of which have injected volatility into bond markets and weakened long-duration performance.
For RIAs, the shift calls for a reassessment of how fixed income functions within client portfolios. Bonds may no longer be inherently “safe,” but with thoughtful positioning and active oversight, they can still play a critical role in delivering durable diversification and consistent income.
Fixed Income Is Behaving Differently—Here’s Why
In early 2024, expectations were high that the Fed would begin cutting interest rates. But stronger-than-expected economic data and stubborn core inflation led the central bank to hold steady. Meanwhile, U.S. federal debt has surged to over 120% of GDP—a trajectory many expect to worsen as deficit spending continues. Much of the debt growth is rooted in pandemic-era stimulus, but ongoing government initiatives aimed at infrastructure, healthcare, and clean energy have sustained spending levels and further strained fiscal balances.
This fiscal backdrop is pressuring bond markets in two key ways: First, higher deficits are fueling inflation concerns. Second, investors are demanding more compensation for long-term lending, pushing yields higher at the long end of the curve.
The result: Long-duration bonds are underperforming significantly. Take the iShares 20+ Year Treasury Bond ETF (TLT), for example, which has dropped roughly 47% over the past five years. When you adjust for inflation, which has pushed consumer prices up more than 25% in that same period, the real loss of purchasing power is staggering—north of 70%.
Clients are noticing. Many are asking questions like: “Why isn’t my bond allocation holding up?” and “Isn’t fixed income supposed to protect my portfolio?” These questions are not just valid—they’re vital. The core premise that bonds inherently provide safety no longer holds in this market. Advisors must move beyond legacy assumptions and reposition fixed income for a higher-volatility, lower-conviction environment.
Rebuilding Fixed-Income Allocations for a New Era
1. Revisit Duration Exposure
Long-duration bonds are particularly sensitive to rising rates and inflation—two forces that show no sign of abating. Static allocation models such as laddering may no longer offer adequate protection or flexibility. Instead, RIAs should consider tactical duration management as a lever to optimize risk-adjusted returns. That means actively reassessing exposure as market conditions shift.
2. Establish a Risk Budget
One effective way to navigate fixed-income complexity is by setting a formal risk budget. This involves determining how much portfolio risk a client is willing to allocate to various income-generating assets and strategies, based on return targets and volatility tolerance.
Rather than locking clients into rigid allocations, this approach allows for dynamic rebalancing across sectors, credit qualities, and maturities. For example, if rate volatility spikes, risk might be shifted from longer-duration Treasuries to short-duration credit or floating-rate instruments.
Regular monitoring of risk parameters ensures that portfolios stay aligned with evolving market regimes—and helps advisors justify tactical moves when speaking with clients.
3. Expand Beyond Traditional Core Bonds
Treasuries and investment-grade corporate bonds remain core holdings, but they’re no longer sufficient on their own. Diversifying across fixed-income sectors can enhance resilience and increase yield potential. Advisors should consider incorporating:
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Floating-rate assets that benefit from rising rates
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Bank loans and collateralized loan obligations (CLOs) for yield enhancement
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Asset-backed securities (ABS) that may offer short duration and credit diversification
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Municipals, especially in taxable accounts for high-net-worth clients
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High-yield bonds for income-focused segments, with proper credit underwriting
These exposures are increasingly accessible through ETFs, mutual funds, and for more bespoke solutions, through separately managed accounts (SMAs) tailored for affluent clients.
4. Favor Active Management Over Passive Buy-and-Hold
In today’s market, a passive approach to fixed income exposes clients to unwanted duration and credit risk. Active managers can add value by adjusting portfolios in real time—shortening duration when rates rise, rotating among sectors based on credit spreads, or taking advantage of dislocations across the curve.
For example, interest-rate-hedged bond ETFs and duration-managed mutual funds can help reduce volatility and protect against drawdowns. Advisors may also want to explore unconstrained bond strategies that allow for a wider toolkit—including global bonds, derivatives, and tactical cash allocations.
5. Balance Yield With Liquidity and Flexibility
It’s easy to chase yield in a volatile market, but doing so without a plan can introduce unnecessary risk. High coupon income alone doesn’t guarantee real returns when inflation erodes purchasing power. Instead, think holistically: Assess yield relative to liquidity needs, duration targets, and drawdown tolerance.
Shorter-term instruments such as Treasury bills or ultrashort bond funds offer modest income while maintaining flexibility. In a rising-rate environment, that optionality is critical.
6. Embrace Client Communication and Education
Advisors should be proactive in helping clients understand how fixed income has changed—and what steps are being taken to adapt. When a “safe” bond fund loses 20% or more, investors need context. Reframing expectations, setting new performance benchmarks, and explaining tactical shifts can reinforce advisor credibility and reduce client anxiety.
Education should also include a discussion about the risks of concentration in long-dated bonds and the benefits of a more diversified, actively managed approach to income.
Bottom Line: Bonds Still Matter—But Strategy Matters More
The idea that fixed income is the portfolio’s “safe” corner no longer holds up under scrutiny. That doesn’t mean bonds have no place—it means they require more scrutiny, more flexibility, and more active oversight. For RIAs, this environment creates an opportunity to deepen conversations with clients, introduce differentiated strategies, and demonstrate portfolio construction expertise.
As rates, inflation, and government debt all remain elevated, adaptability—not historical precedent—is the key to success. Bonds are still essential—but only when managed with the same level of thought and rigor as equities or alternatives. The rules have changed. Now it’s up to advisors to lead the way forward.
