The fixed income dilemma inancial.com

The fixed income dilemma

A tough spot for bond investors

If you want a level of protection from a market decline, fixed income investments have traditionally been a potential solution. And, during times of volatility, it is no surprise that investors turn to bonds. However, this approach is not as safe as you may think. With interest rates at record lows, the ability of bonds to provide income, capital appreciation, and most importantly, act as a portfolio ballast in times of stress is fundamentally challenged.

It's time to reevaluate fixed income investing. Let's get started.

Market Insights

Three major risks-- all stemming from the extremely low interest rate environment-- have been pushing bonds out of their "safety" position:

1

Shrinking yield cushion

2

3

Rising interest rate risk

Lower future returns

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Market Insights

Can you count on bonds to cushion a fall?

1 Shrinking

yield cushion

With today's historically low interest rates combined with potentially limited capital growth from falling bond yields, fixed income may not provide the same protection against equity losses that it once did.

Yield cushion

=

Interest income

+

Capital growth from falling bond yields

Bloomberg U.S. Aggregate Bond Index yield comparison: 1990 vs. today

10%

9%

8%

7% More protection

High income with 6% ample room for

yields to drop and

5%

produce capital

gains 4%

8.5%

7.2%

Less protection

Low income with little room for yields to drop and produce capital gains

3%

2%

3.0%

2.9%

1%

0%

Source: Bloomberg, 3/31/22.

1990

2000

2010

1.1%

2020

2022

(as of 3/31/2022)

For financial professional use only. Not for use with the public.

2

Market Insights

Is the reward worth the risk?

2 Rising interest rate risk

Duration

Since the financial crisis, interest rate risk has been rising while yields have been falling. And that creates a poor risk/reward trade-off for fixed income and leaves portfolios very vulnerable to rising rates.

The higher a bond's duration, the more sensitive its price is to a change in interest rates.

Today's combination of low rates and high price sensitivity means even a small increase in rates can result in capital losses.

Low rates

High price sensitivity

Bloomberg U.S. Aggregate Bond Index characteristics

Yield (%)

9%

8%

7%

6%

5%

4%

3%

Yield (%)

Duration (Years)

2%

1%

0%

6.6 years 2.9%

7 years 6 years 5 years 4 years 3 years 2 years 1 years 0 years

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 3/31/2022

Source: Bloomberg, year-end 12/31/1990--3/31/22.

Date

Yield

Duration

How much would interest rates need to rise to completely offset the yield of the Agg?*

3/31/2022

2.9%

6.6 years

44 bps

12/31/2021 12/31/2020 12/31/2009

1.8% 1.1% 3.7%

6.8 years 6.2 years 4.6 years

26 bps 18 bps 80 bps

12/31/1999

7.2%

4.9 years

147 bps

12/31/1989

8.6%

4.6 years

187 bps

Source: Bloomberg, JPMorgan Asset Mgmt., annual figures represent the year's average.

* Yield increase for a 0% return on the Bloomberg U.S. Aggregate Bond Index uses the rule of thumb defining duration as the % point decrease in bond prices resulting from a 1% point increase in bond yields.

For financial professional use only. Not for use with the public.

3

Market Insights

What can we expect from future bond returns?

3 Lower future returns

In addition to the shrinking yield cushion and rising interest rate risk, consider the low expected returns from fixed income. Over the past 43 years bond returns averaged approximately 6%. But it's unlikely fixed income will generate such returns in the coming years.

Nobody can say for sure what the market will do, but we do know that there is a strong correlation between starting bond yield and subsequent bond returns. If the correlation continues, given current yield, investors could expect returns of 1% ? 3% over the next decade.

2.9%

Current yield (as of 3/31/2022)

Bloomberg U.S. Aggregate Bond Index starting yield and subsequent returns

18%

16%

14%

Starting yield

Subsequent 10-year nominal returns

Percent (%)

12%

Correlation

= 97%

10%

8%

6%

4%

2%

0%

Source: Research affiliates based on data from Bloomberg and FactSet as of Mar. 31, 2022. Proxy: Bloomberg U.S. Aggregate Bond Index. Past performance is not a guarantee or a reliable indicator of future results.

For financial professional use only. Not for use with the public.

4

Market Insights

Bringing protection and growth into balance

With bonds unlikely to generate meaningful returns, how do you position a portfolio for growth, while continuing to provide downside protection?

Clients nearing retirement may be more cautious about market risk and interested in a strategy designed to provide:

100% protection to help guard against downturns

Upside potential with growth tied to market indices

Control clients' costs with no explicit product charges for 7 out of the 8 account options

Confidence that you're working with a consistent and dependable provider

With Lincoln OptiBlend fixed indexed annuity as part of a portfolio, you may help your clients bring protection and growth into balance.

Portfolio with Lincoln OptiBlend? fixed indexed annuity

Equities

Lincoln OptiBlend

Fixed Income

Indexed accounts are tied to market performance, but they are not an actual investment in the stock market. You cannot invest directly in an index.

For financial professional use only. Not for use with the public.

5

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