INSIGHTS

On October 19, 2026

AAM Viewpoints — Higher Yields, New Opportunities

Over the past year, investors in fixed income have dealt with a reality they aren’t accustomed to a relatively quick repricing of the market. Yields have moved higher and bond prices have moved lower, all in a relatively short amount of time. There have been several catalysts that have contributed to the repricing, including persistent (sticky) inflation, higher Treasury bond issuance, consistently strong overall economic growth, and shifting market expectations for Federal Reserve monetary policy (to raise rates or not). Regardless of the causes, most investors have experienced a decline in the value of many of the income-producing assets they hold and has caused some consternation.

Most investors would naturally ask themselves and their advisor: Now what?

Many may not realize that the answer could be more encouraging than they thought. Rising rates do cause existing bond prices to decline, but they also create a market environment where future return potential improves. When investors compare the low-yield environment experienced just a few years ago to the higher yields available today, it may represent a better starting point for long-term bond investors in terms of both generating income and total return. Given much of the commentary from many analysts and strategists are now calling for rates to remain at or near these levels for some time, in a “higher for longer” scenario, you may also hear more opinions stating they are more constructive on fixed income than they have been in a long time given the higher yields, with income being the primary driver of returns.

Ten-year U.S. Treasuries are now at yields last seen in the early 2000s.

Past performance is not indicative of future results.

Investment grade corporate credit yields, as measured by the ICE BofA US Corporate Index, are right at 6%, which is the highest seen in a few years and with the backdrop of consistently strong earnings and stronger balance sheets than in past periods of dislocation. Also, an interesting comparison is the dividend yield on equities versus investment grade corporates, which can pick up about 100 basis points (one percentage point) over the yield on the Dow Jones Industrial Average stocks and about 400 basis points over the yield on the S&P 500 index. The adage of “there is no alternative” (TINA) may not be true at this point.

Investment Grade yield-to-worst over the last few years:

Past performance is not indicative of future results.

A higher yield environment can make a difference. For many years, bond investors have had to take on significant interest rate or credit quality risk to try to get acceptable returns given historically low yields.

Investment grade corporate bonds, municipals, mortgage-backed securities and many other fixed income sectors now offer yields that would have seemed extremely attractive just a few years ago. Even with elevated volatility, higher starting yields should provide a stronger foundation for future returns. Conversations between advisors and clients may look a bit different now, focusing more on adequate income generation with predictable cash flows, portfolio diversification, and even long-term potential returns. Since the starting yield has historically been a good predictor of future returns in fixed income, yields available also can provide a bit of “cushion” for potential rate moves.

As an example for illustrative purposes only:

Source: AAM | For illustrative purposes only.

No outcome is guaranteed, of course, but investors today are being paid considerably more to own bonds than they have been in years. That said, not all bonds are the same and instead of just “buying the market,” investors can customize what they own with more choices that make sense in today’s market, locking in higher yields for a longer period of time. As a result of corporate earnings and balance sheets remaining generally healthy, credit spreads are still relatively tight so investors may take this opportunity to increase the credit quality of their holdings. They may also want to adjust how much duration risk they are taking. Yields today can provide adequate income without extending as far out on the maturity spectrum as was in the past, but at least now investors are getting compensated more for doing so if they choose. Lastly, when considering choices for investors in higher tax brackets, the taxable equivalent yields available in municipal bonds also deserve some attention. Right now, constructing income-oriented portfolios with a more strategic and customized approach, while locking in higher yields could be more beneficial than some of the packaged products options available.

No one knows how long yields/rates will stay at these levels, even if it is longer than originally expected. You will want to pay attention to inflation trends, as cooling inflation could bring down rates. Government actions could also affect the market via rate increases or even cuts along with the level of borrowing increasing or decreasing — both influencing the bond performance in either direction. And of course, if economic growth does stall, higher-quality bonds will stand to benefit as rates move lower. Additionally, if appropriate, fixed income investors have an opportunity to use any losses to offset any potential investment gains across their portfolio with tax-loss swaps. Selling positions that are down in value and replacing them with higher coupons, differing maturities or credit profiles could help those investors actually use a loss for a positive outcome. Please consult your tax advisor to see if this is right for you.

Although the recent selloff has been orderly, it hasn’t been particularly pleasant for fixed income investors. It may be helpful for investors to recognize the bond market has repriced to a more attractive starting point and much better income generating options. The opportunity that has been created by the recent move may turn out to be a good thing going forward as bonds can once again provide good income, diversification, quality and stability/ballast for long-term investors.

CRN: 2026-1002-13836 R