The value of a multi-sector diversified income approach for fixed income

The past few months highlight how quickly the investment landscape can shift for fixed income investors. After a strong rally, global bonds began 2024 on the back foot as hopes for as many as six U.S. Federal Reserve (Fed) rate cuts receded. They recovered some ground on indications that the Fed might begin cutting in June but pulled back again when policymakers signaled that the timeline for easing may be delayed due to resilient U.S. growth and inflation. Going forward, it appears that economic data releases will continue to influence sentiment and trigger swings in financial markets.

However, going beneath the headline numbers reveals that the returns of various underlying fixed income sectors year to date are far from uniform. Although high‑quality sovereigns and corporate credit declined, high yield corporate bonds produced gains. Dollar‑denominated emerging market (EM) debt has also performed well as credit spreads compressed meaningfully. Such variation in sector performance can be seen over longer time periods too (Figure 1), with changing market conditions favoring different bond sectors.

We believe that this divergence, alongside expectations for continued market fluctuations, speak to the importance of maintaining a globally diversified fixed income allocation. Investing across multiple fixed income sectors can help investors to generate more stable returns while also mitigating volatility, in our view. Here to discuss the outlook are Kenneth Orchard and Vincent Chung, who manage T. Rowe Price’s Diversified Income Bond Strategy.

What are the key features of the Diversified Income Bond Strategy?

Kenneth Orchard: The Diversified Income Bond Strategy is an actively managed, flexible “go‑anywhere” core bond strategy that aims to provide investors high yield‑like returns, with investment‑grade levels of risk (Figure 2). To do so, we leverage the full breadth and depth of T. Rowe Price Associates, Inc’s (TRPA’s) fixed income capabilities and integrate the best income ideas from our global research platform into a single high‑quality portfolio.

We have the flexibility to invest across the broad fixed income universe, spanning more than 15 major fixed income sectors, 80 countries, and 40 currencies, to help us identify the most attractive opportunities. We believe that opening up the global bond opportunity set in this way allows us to seek higher yields and better risk‑adjusted returns.

More importantly, diversifying return and income sources from various higher‑yielding sectors also allows the strategy to take on different types of risks that may be unrelated or even negatively correlated. This helps to lower overall portfolio volatility, better positioning it to pursue consistent long‑term returns.

What solution does the strategy provide to investors? Who might consider the strategy?

Kenneth Orchard: The Diversified Income Bond Strategy really offers a “one‑stop shop” for investors’ fixed income allocations. Not only do we seek diversified exposure across the full global fixed income opportunity set, we also tactically adjust sector, duration, and currency exposures depending on the insights from our research platform on market developments, valuations, and the stage of the economic cycle, to name a few examples. This flexible process helps to relieve the burden of investors having to worry about what to buy or when to make reallocation decisions.

Therefore, we believe the strategy is a good fit for all types of investors. In particular, it may be helpful for those who seek consistent income streams in a more prudent manner and without taking on excessive risk. A more stable potential income stream may also provide a cushion during periods of market stress.

What are the key differentiators of T. Rowe Price’s approach?

Vincent Chung: One of the strategy’s major distinguishing features is its truly global nature. This is distinct from other fixed income solutions that may have heavier tilts toward specific sectors, such as U.S. core bonds or securitized credit. In contrast, we prefer not to focus on geographies or sectors to avoid concentrations in a single sector or interest rate cycle. Instead, we utilize the full global opportunity set, including government, corporate, and securitized debt, both investment‑grade and high yield issues across developed and emerging markets. We are also able to invest in nonmainstream sectors, such as mortgage‑backed securities and convertible bonds.

We view access to such a wide fixed income investment universe as crucial because it gives the strategy more sectors, issuers, and interest rate exposures to choose from, enabling us to pursue geographically and sectorally diversified sources of total return and income (Figure 3). This, in turn, also means we are harvesting a variety of risk premiums. Our portfolios are well diversified across global duration, currencies, credit, emerging markets, and structured and liquidity risks, rather than being excessively exposed to any one factor. It is this combination that enables the strategy to capture attractive yield and return opportunities with lower levels of volatility.

Of course, the effectiveness of our approach stems primarily from our strength in security and sector selection, which is underpinned by our extensive global research resources. Our seasoned fixed income portfolio managers are supported by dedicated credit and sovereign analysts who cover all major sectors. Further setting our capabilities apart is a culture of true cross‑asset class collaboration. Fixed income analysts often work closely with their equity counterparts, sharing fundamental research and attending joint meetings with companies. This strong relationship gives access to corporate fundamentals that are not typically afforded to credit researchers.

How do you identify opportunities and determine sector allocations? Do you take a top‑down or bottom‑up approach?

Vincent Chung: In managing the strategy, we take a holistic approach that synthesizes top‑down macro views with bottom‑up fundamental research. The goal is to build an optimal fixed income portfolio, drawing on the best ideas from across our research platform.

Kenneth and I have primary oversight of the Diversified Income Bond Strategy. We are responsible for setting sector allocation targets, as well as making decisions on exposures to global rates and currencies. We also work with a team of experienced sector portfolio managers, who are all experts in their respective market areas. The sector portfolio managers, in coordination with their respective teams of credit analysts and traders, contribute high‑conviction ideas for security selection.

Our credit analysts conduct bottom‑up, fundamental, technical, and relative value analysis on securities that they cover, including assessment of environmental, social, and governance factors.^[1] Their recommendations, expressed via proprietary credit ratings and conviction scores, are key to helping us uncover promising investment opportunities while avoiding issues with deteriorating fundamentals.

What is your outlook for the rest of 2024? How might the Diversified Income Bond Strategy add value for investors in this environment?

Kenneth Orchard: Continued U.S. economic exceptionalism, relative to the rest of the world, raises the likelihood of monetary policy divergence from major central banks. We think this may present an appealing opportunity for fixed income investors to increase exposure to global bonds, which could be well positioned to benefit from falling interest rates outside the U.S. (Figure 4).

Meanwhile, all‑in yields remain attractive, while improving macroeconomic conditions should continue to be supportive for risk assets. That said, credit spreads have tightened considerably, leaving limited buffer should conditions suddenly deteriorate. This underscores the importance of maintaining a selective and diversified approach to manage downside risks.

Ultimately, the T. Rowe Price Diversified Income Bond Strategy’s active management style and robust risk controls help it to minimize volatility through different market cycles. We can adjust risk positions, hedges and liquidity, and are able to take more defensive or opportunistic positions as market conditions evolve. It is this flexibility that helps the strategy achieve its value proposition—giving investors a smoother ride through market volatility while still pursuing consistent returns and income.