Unconstrained fixed income: Much appreciated

Written by: Global Thought Leadership | October 13, 2017

Source: Bloomberg, as of 10/9/2017. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment. 



  • When investors think about their bond allocations, the focus is often on the ability to deliver income as well as dampen volatility.
  • But just as stocks can generate useful streams of income as well as capital appreciation, bonds can generate useful capital appreciation as well as income.
  • Unconstrained fixed income managers typically look to both in their pursuit of total return, evaluating the potential appetite among investors for a given bond as well as the relative value of its coupon payments.
  • But the proportion of return contributed by each can be surprising.  Consider the high yield market over the past two years.  Between September 30, 2015 and September 30, 2017, the Bloomberg Barclays U.S. Corporate High Yield Bond Index rose a little over 22.7%.1
  • Of that rise, over two-thirds (15.1%) came from the coupon payments of the bonds in the index while 7.7 % came from price appreciation of those bonds.
  • Similar math applies to other closely-followed bond indexes for the period. For the U.S. Investment-grade Corporate Index, the total return of 11.0% is includes a coupon return of 8.3% and price return of 2.7%; for Emerging Markets, price return was 7.2%, coupon return was 12.1%, for a total return of 19.3%.
  • Here’s where it gets more interesting: as the chart shows, U.S. high-yield bond returns struggled right after 9/30/2015, not turning the corner until February 12, the following year.
  • But between that date and September 30, high-yield bonds had a very strong total return of 31.4%: 13.0% was derived from coupons, and 18.4% from price appreciation.
  • So, two key lessons here: reinvesting coupon income can be a major part of return, even in today’s low-yield environment.
  • Second, entry points are critical for investors seeking to capture the kind of strong price appreciation seen in the high yield example above.
  • That’s a huge focus for experienced active bond managers who must be ready to dive in, whether on a sector or security level, to position themselves for swings in value can add significantly to returns – even over time periods as small as two years.


IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not  take into account the particular investment objectives, financial situation or needs of individual investors.