Real Reasons to Consider Core Fixed Income

Higher real yields and attractive income-related return potential are reinforcing the case for core fixed income. We examine the three reasons why we believe investors may want to look beyond cash.

Key Takeaways

1

Real Yields Are Back

Several developments this year have reinforced an already attractive starting point for fixed income investors. Notably, the portion of core bond yields that exceeds inflation has risen to its highest level in more than 15 years.

2

Income Can Do the Heavy Lifting

Investors can increasingly rely on income, rather than falling rates, for fixed income to earn its role in portfolios.

3

Opportunity Extends Across the Core Bond Universe

The window remains open for moving beyond cash while maintaining a high-quality allocation with attractive yields by owning diversified core bonds.

1. “Real" really matters

Bond yields have moved meaningfully higher this year, but the most important development may be what those yields represent after accounting for inflation. While inflation remains top of mind for many investors, today's bond market offers some of the most attractive real income, or inflation-adjusted income, available in recent history.

This distinction matters. As of July 31, the Bloomberg US Aggregate Index, the benchmark most synonymous with core investment grade fixed income, offered a yield to worst of approximately 5.0%, an attractive level in its own right. But the story goes beyond the nominal yield itself. Half of that yield, 2.5%, represents real income, the portion earned above inflation. As shown below, this inflation-adjusted income is at its highest level in more than 15 years.

Inflation-adjusted income in core bonds is at a more than 15-year high Line chart showing Bloomberg US Aggregate Index real income increasing to 2.5%, its highest level in more than 15 years, as of July 31, 2026.

Line chart showing Bloomberg US Aggregate Index real income increasing to 2.5%, its highest level in more than 15 years, as of July 31, 2026.

Source: Bloomberg. Real income calculated as Bloomberg US Aggregate Index yield-to-worst minus latest Core CPI. As of July 31, 2026.

Because real yields influence valuations across fixed income, this improvement is not confined to a single sector or security type. The inflation-adjusted income available across core fixed income has risen meaningfully, strengthening the case for investors seeking high-quality income and diversification.

2. Let income do the work during volatility

But what about volatility? It is a fair question. We are closely watching several dynamics: the path of Fed policy remains uncertain, fiscal pressures may push government bond yields higher, and a re-acceleration in inflation from tariffs or supply shocks cannot be ruled out. Investors should expect headline-driven moves to remain a feature of bond markets. Our outlook reflects this nuance: we favor a pro-income stance while cautioning against strong outright views on duration.

The reason is fundamental: at today's yield levels, a core bond portfolio may not need rates to fall to deliver attractive returns, as income can do much of the work. Investors focused on recent price swings may be overlooking how much the starting point has shifted in their favor.

Over the past 20 years, the Bloomberg US Aggregate Index has generated a cumulative return of approximately 92%, despite producing negative monthly returns roughly half the time. Income continued to compound through periods of market volatility. Today, the Index yield of roughly 5.0% stands well above its 20-year daily average of 3.25%.

For investors considering where to put money to work, the opportunity today extends beyond simply owning bonds. Higher starting yields have improved the case for core fixed income, while creating meaningful differences in value across sectors. How investors allocate within core bonds may matter just as much as the decision to own them outright.

Calendar year Bloomberg US Aggregate Index price and coupon returns Stacked bar chart comparing Bloomberg U.S. Aggregate Index price and coupon returns, with coupon returns remaining positive while price returns varied across 2019–2025.

Stacked bar chart comparing Bloomberg U.S. Aggregate Index price and coupon returns, with coupon returns remaining positive while price returns varied across 2019–2025.

Source: Bloomberg PREP. Calendar year data through December 31, 2025.

3. Finding opportunity within core fixed income

Our approach to core fixed income is active, seeking excess returns through rigorous relative value analysis across high-quality fixed income to identify attractive carry opportunities while maintaining diversification across the investment-grade universe. Several themes are shaping our positioning:

Build for carry within the core
We see opportunities in areas where investors are being paid more for a similar level of credit risk. Today, the securitized credit portion of the opportunity set stands out on a relative value basis, offering spread pickup over comparably rated corporates while benefiting from structural loss protection.
Diversify within fixed income
Government, securitized assets, and corporate bonds each respond differently to macroeconomic conditions. Actively allocating across these building blocks can provide more balanced sources of income and diversification than static index weights.
Stay selective
Index-level spreads are tight, but dispersion within credit is elevated, rewarding managers who distinguish between issuers, not just sectors.
Use active flexibility
Static allocations are poorly suited to a volatile market environment. Active management allows portfolios to adjust exposure and capitalize on dislocations as opportunities emerge.

We are ready to help you evaluate today’s fixed income opportunities and the role core fixed income can play in portfolios.

Author(s)

Chris Nicholson

Client Portfolio Manager, Fixed Income

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Risk considerations and disclosures

Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. The value of securities with variable and floating interest rates are generally less sensitive to interest rate changes than securities with fixed interest rates. Variable and floating rate securities may decline in value if interest rates do not move as expected. Conversely, variable and floating rate securities will not generally rise in value if market interest rates decline. Credit risk is the risk that an issuer will default on payments of interest and principal. Credit risk is higher when investing in high yield bonds, also known as junk bonds. Prepayment risk is the risk that the issuer of a security may pay off principal more quickly than originally anticipated. Extension risk is the risk that the issuer of a security may pay off principal more slowly than originally anticipated. All fixed income investments may be worth less than their original cost upon redemption or maturity.

When interest rates increase, fixed income securities will generally decline in value. Fluctuations in interest rates may also affect the yield and liquidity of fixed income securities.

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Date of first use: August 19, 2026