Why Fixed Income Looks Attractive Right Now

   By: Connie Christian, CFA
   (Manager, Fixed Income)
 
   

February 9, 2026

Compared to a few years ago, fixed income once again looks like a valuable source of diversification for investors. In the low-coupon world of the last decade, bonds offered little income and meaningful downside risk when rates moved higher. Today, the math is different. Coupons are meaningfully higher, and bonds have a much better ability to cushion portfolios during periods of volatility.

This reset has restored one of fixed income’s core roles: providing balance. When growth slows or risk assets struggle, bonds with reasonable yields can stabilize returns and generate income. That combination of income plus downside protection is more pronounced now compared to the recent past, offering more meaningful risk reducing characteristics in a balanced portfolio.

A slower growth environment also plays to fixed income’s strengths. After years of above-trend growth, fueled by fiscal stimulus, pent-up demand and low interest rates, the global economy is decelerating. Slower but still-positive growth tends to reduce inflation pressure over time and increases the likelihood that central banks are closer to the end of tightening cycles than the beginning. Even if policy rates stay “higher for longer,” they are unlikely to rise indefinitely. That asymmetry matters. When economic growth cools, fixed income benefits from stable or falling rates, tighter financial conditions that reward quality, and a renewed focus on cash flow rather than capital appreciation.

Importantly, today’s opportunity set is not limited to government bonds. Credit markets now offer yields that compensate investors for taking selective risk, especially when balance sheets are still generally healthy and defaults remain contained. Plus, the income provided by bonds provides a cushion which reduces reliance on precise predictions about interest rate movements. In a slower growth world, that steady income stream becomes increasingly valuable.

How Institutional Investors Can Take Advantage

For starters, active management is usually advantageous in fixed income. Bond benchmarks are typically constructed so that the most indebted issuers have the largest weights. Thus, simply hugging the benchmark via passive management means owning a portfolio that is, by definition, heavily exposed to leverage.

On the other hand, active management allows investors to be selective, tilting toward quality and liquidity, avoiding excess leverage, and deliberately positioning to protect capital while generating income. Active managers can use a broad toolkit: adjusting duration and curve exposure, focusing on issuer balance sheet quality, and finding relative value across sectors and regions. They can also manage downside risk intentionally rather than inheriting it through an index, which is an advantage in a market where monetary policy uncertainty is elevated.

For example, Wespath’s actively managed fixed income fund for institutional investors, the Fixed Income Fund – I Series (FIF-I), has taken advantage of the tools described above and found opportunities in the market. In 2025, the fund generated an 8.42% return, net of fees, outperforming its benchmark’s return of 7.34%. Over three years, the fund has generated an annualized return of 6.34%, outpacing its benchmark by 0.99%, and over five years, the fund returned an annualized 0.73%, outperforming its benchmark by 0.69%.¹

These results highlight how blending complementary active management styles and strategies in fixed income can add meaningful value over a broad market index. They also highlight how Wespath’s investment philosophy, which emphasizes thoughtful incorporation of best-in-class investment strategies, manifests itself in the fixed income asset class and supports the nonprofit organizations we serve.

How Fixed Income Fits in a Diversified Portfolio

Another core tenant of Wespath’s investment philosophy—purposeful diversification—is relevant in today’s environment, as fixed income looks to remind investors about its critical role in a multi-asset portfolio.

For example, with inflation well off its 2021-2022 highs, the correlation between bonds and equities has begun to normalize, restoring fixed income’s diversification benefit. In fact, the correlation between 10-year U.S. Treasuries and the S&P 500 Index, as shown in the chart below, has been declining for several years:

A lower correlation between stocks and bonds is beneficial for the purposes of diversification, as bonds often serve to reduce risk and provide stability during volatile periods for equities. If in practice stocks and bonds move higher and lower at the same time, this core purpose becomes muted. Correlation peaking during 2020 and 2021 is no coincidence: When there is higher unexpected inflation, interest rates increase and bond prices decrease, and at the same time, rising costs erode corporate profits and put downward pressure on equity valuations. Thus, cooling inflation has helped usher in a return to normalcy in the correlation between stocks and bonds.

Said differently, investors seeking diversification have choices again. Organizations with lower risk tolerance or pools of capital that require more stability no longer need to reach far out on the risk curve to generate income. High-quality bonds can once again do what they are meant to do: provide income, preserve capital and diversify equity risk.

That said, fixed income investing is not without risks. Increased fiscal spending is a meaningful concern, particularly in developed markets where debt levels are already high. Larger deficits can put upward pressure on long-term yields and increase volatility in government bond markets. Geopolitical risks remain elevated, from ongoing conflicts to trade tensions and supply chain realignments, all of which can introduce inflation shocks or sudden risk-off episodes. But these risks argue for humility, diversification and active oversight, not for avoiding fixed income altogether.

Additionally, Wespath’s investment process is designed to help mitigate these risks through disciplined and repeatable oversight. We emphasize purposeful diversification not just across asset classes, but also across sectors, strategies and managers, when investing in fixed income.

Meanwhile, thorough due diligence seeks to evaluate whether underlying managers have the skill, process and resources to deliver on their stated objectives. Clear guardrails help keep the overall fund aligned with its intended structure, while well-defined guidelines and risk controls provide Wespath’s investment managers with the tools and boundaries needed to manage portfolios prudently. Together, these elements create a framework that empowers resilience across a range of market environments and is well suited to support the missions of nonprofit institutional investors.

Closing Thoughts

In today’s environment, fixed income is a meaningful source of income, diversification and potential return for institutional investors. The reset in yields has changed the equation: Higher coupons provide more income, slower growth supports bond fundamentals, and active management offers a way to navigate a more complex landscape. While risks remain, fixed income deserves a place in portfolios, not as an afterthought, but as a deliberate, forward-looking allocation.