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While advisors have strong convictions about the resurgence in yield, inflation remains their top risk concern (89%), followed by central bank policy uncertainty (56%). Most (69%) agree that lower inflation would make bonds more attractive, yet 60% don't think that inflation or interest rates have peaked yet. The consensus is split in their views on duration, and 58% of advisors say they aren't comfortable taking on duration risk.

Other key findings:

- 58% believe short duration will outperform in 2023, and those who share this outlook also are more inclined to agree that inflation has not yet peaked (71%). Of the 42% who are betting on longer durations, 55% think inflation already has peaked.
- 69% believe bonds have not yet fully decoupled from equities after seeing bonds and stocks both lose ground last year.
- 32% are worried about missing the right entry point into the bond markets.
- 80% agree that in the current environment, it's important to work with an experienced, active bond manager, and 71% say active management makes more sense than passive for fixed income.

"Interest rates at or near all-time lows have held bonds to historically low yields, forcing many investors to go further afield not only for income but also for risk management," said Rick Raczkowski, executive vice president, portfolio manager and co-head of the Loomis Sayles relative return team. "After the past year's rate hikes, 80 percent of advisors look to bonds to produce income, and three in four say that bonds once again are ballast in portfolios during times of volatility."

Beyond yield: Advisors also looking to fixed income for risk management

While many advisors see fixed income as a way to generate income for clients, they are even more likely to see fixed income as a way to mitigate portfolio risk by enhancing diversification (85%). Similarly, two-thirds of advisors (67%) see fixed income as helping to minimize risk of loss.

Despite the renewed focus on fixed income's properties for generating income and providing risk management, surprisingly few advisors are looking for the asset class to fulfill other traditional roles associated with it. Even though they see this as the best return opportunity for bonds in 15 years, less than half of advisors (47%) are looking to pursue total return with their fixed income investments. Given that they are shying away from the duration risk inherent in government bonds and focusing on credit risk, only 45% are looking for tax efficiency out of fixed income holdings-another time-honored function of bonds.

What's keeping advisors up at night? Inflation. Rates. Then everything else.

At roughly 5%, inflation may be about half of its peak a year ago, but it remains generationally high and more than double the Federal Reserve's 2% target rate, leaving the possibility of additional rate hikes, in our opinion. With the potential for a recession on companies' radar for months, they have had time to strengthen their balance sheets and streamline operations to prepare for any recessionary impacts. As a result, many advisors have less concern about credit and default risks since companies appear to be actively preparing for a recession.

The survey found:

. 66% of advisors worry that high inflation could linger longer than expected.
. 50% worry that this could push rates higher than anticipated, with 33% saying rates could stay higher for longer than expected.
. Other common fixed income concerns trail well behind, including credit spreads (27%), default risk (24%), liquidity (24%) and currency risk (13%).

Some observers have been surprised at how little impact Wall Street seems to have had on the debate in Washington over a possible debt ceiling showdown between the Republican-led House and the Biden administration. The lack of concern is borne out by the fact that just 15% of advisors say they are losing any sleep over the impact the showdown could have on bonds.

Looking ahead: What advisors expect

With the rates on 10-year US Treasuries hovering around 3.5% and more hikes likely, most advisors project rates between 3.5% and 3.99% (31%) or 4.0% and 4.49% (28%) - both still far short of the historical average of 5.89%. So, a combined three in five (58%) advisors think rates will remain range-bound, which should reduce concerns about potential duration risk.

With uncertainties about inflation and rates, 77% of advisors believe active investments will outperform passive investments. Two-thirds (66%) believe traditional fixed income will outperform alternatives. Six in 10 (59%) also project that investment-grade bonds will outperform high-yield bonds (41%).

Advisors continue to use more tried-and-true investment structures, with 87% using bond funds and 73% investing in passive ETFs. However, consistent with their view that active will outperform passive, 58% also are finding a place for active ETFs in their portfolios, and 66% say active ETFs are an increasingly attractive option for fixed income.

Full press release:

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