90-day delinquencies on auto loans and credit-card balances have risen to multi-decade highs. 

The Potential Solution: Implementing Fixed Income

Against this backdrop, we argue that while a fixed-income allocation is always a compelling component of a diversified portfolio, it’s more important now than it’s been in recent memory. But, of course, there’s more than one way to allocate to fixed income. In our view, prudent investors may wish to do the following: 

• Be active, be flexible: We think adhering to pure benchmarks during a time of volatility and uncertainty is likely to diminish returns rather than enhance them. While growth could slow, inflation could remain sticky, presenting a stagflationary¹ impact. If this is the case, dynamic fixed-income strategies will likely fare better than rigid, benchmarked strategies.

• Go global: Bond markets abroad have come alive. Often, when hedged back to US dollars, international fixed income can potentially offer a more attractive return with additional diversification.

• Remember, not all fixed income is created equal: We expect credit markets to continue to perform, but be mindful of issuer and sector selection. This will be critical for risk management.

• Consider yield: Yields are still attractive from a historical perspective and may offer substantial carry² and cushion to total return. 

The political and economic narrative is likely to seesaw back and forth as policies are announced, withdrawn, and rescheduled, but the net effect is potential market volatility. While we believe the underlying US economy remains in good shape (without the strategic imbalances that were endemic in the era leading up to the 2008 Global Financial Crisis), headwinds exist, and investor vigilance is necessary. We believe that as these new paradigms take root, fixed income could be an attractive option in a volatile and uncertain environment. 

To learn more about the benefits of investing in fixed income, talk to your financial professional.

^* The final draft of the bill may include additional tax stimulus either in increasing the SALT (state and local tax) cap or having no taxes on tips. The SALT deduction permits taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments. The Tax Cut and Jobs Act capped it at $10,000 per year, consisting of property taxes plus state income or sales taxes, but not both.

¹ Stagflation is an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation.

² Carry is the difference between the yield on a longer-maturity bond and the cost of borrowing.

Important Risks: Investing involves risk, including the possible loss of principal. • Fixed-income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. • Diversification does not ensure a profit or protect against a loss in a declining market.

The views expressed herein are those of Wellington Management, are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. They should not be construed as research or investment advice nor should they be considered an offer or solicitation to buy or sell any security. This information is current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.