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2022 was a challenging year for publicly traded asset classes due to aggressive interest rate hikes by central banks to tame inflation. Traditional government and corporate bond strategies provided little protection, resulting in negative returns for most investors. However, alternative fixed income strategies were able to avoid significant drawdowns and add value for investors.

As the rate hiking cycle approaches its end, it may be a good time to add to high-quality fixed income, with bond yields being greater than they have been in many years, offering a wide margin of safety. The risk-reward of fixed income appears superior to equity investments and traditional alternative assets.

BBB-rated bonds now offer the same yield as real estate cap rates without sacrificing liquidity. The return from publicly traded investment-grade credit compares favorably to historic returns from lower-quality private debt portfolios.

Looking forward, markets are expected to remain volatile in 2023 as central banks continue to tighten financial conditions. Although a recession is expected, corporate credit fundamentals remain sound, and active management is crucial for navigating the market.

Historically, investing in advance of the final rate hike has generated strong returns, and market pricing implies the peak overnight rate will be reached in mid-2023. The yield on bonds is now competitive with real estate cap rates, and the historical relationship between bond yields and equity earnings yield is 2-3 standard deviations away from the average, making bonds more favorable than equities from an income perspective.