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Fixed Income

Interest Rate Concerns? Consider a Multisector Income Strategy

Our Multisector Income strategy may help investors navigate volatile rates, persistent inflation and Fed policy uncertainty.

By  Balaji Venkataraman

Key Takeaways

The fixed-income strategies investors relied on when rates were ultralow may not provide solid risk/reward potential in today’s bond market.

Interest rate volatility is a key challenge for bond investors, which we believe underscores the importance of active duration and sector management.

We believe a dynamic and diversified Multisector Income strategy may offer investors attractive risk-adjusted performance potential in today’s market.

Investors face a new bond market landscape. The investment strategies that previously provided attractive performance potential may not be well suited for today’s market.

For example, since the Great Financial Crisis of 2007-2009, many fixed-income investors have favored funds from Morningstar’s® Core Plus category. These funds typically consist of a core base of Treasury, investment-grade corporate and mortgage-backed bonds supplemented with higher-risk/higher-return-potential securities. In the low interest rate environment following the crisis, these strategies gave investors the prospect of attractive returns and yields.

Higher Rates and Higher Inflation Highlight Investors’ Concerns

Today’s climate is clearly different. Interest rates are notably higher, and inflation remains above the Federal Reserve’s (Fed’s) target rate. Furthermore, Fed policy sits in a holding pattern, with the target short-term lending rate hovering at its highest level in 23 years.

Ultimately, we expect the extended era of high interest rates and inflation to weigh on the economy, triggering a period of below-trend growth. We believe this environment requires dynamic duration and risk management to meet investors’ fixed-income objectives.

Our goal is for the Multisector Income strategy to provide an all-weather fixed-income solution able to respond to changing market conditions.

Interest Rate Volatility Has Emerged as a Leading Risk to Bond Investors

Fixed income is in a decidedly new regime, where yields have been broadly higher. But, at the same time, interest rate volatility has remained elevated, as Figure 1 illustrates. Because its duration is linked to the Bloomberg U.S. Aggregate Bond Index, the core plus strategy has exposed investors to this heightened rate volatility.

Figure 1 | Treasury Volatility Has Been Elevated Compared with Historical Levels

Recent Declines Come After Two Years of Above-Average Volatility
Line chart showing the MOVE Index compared to the total period average and the two-year average index price.

Data from 12/31/1999 – 3/28/2024. Source: Bloomberg. The ICE BofAML MOVE Index (MOVE) measures U.S. interest rate volatility. It’s not possible to invest directly in an index.

New Bond Market Backdrop, New Alternatives for Bond Investors

Given this backdrop, we believe it may be time for investors to rethink their fixed-income approach. In our view, today’s economic and market environments demand a fixed-income option that nimbly and dynamically manages duration and credit risk. We prefer this approach over the traditional core plus strategy, which is typically less dynamic and often has longer duration and high credit risk.

Rate Volatility Has Dominated Fixed-Income Performance

According to Morningstar, the average core plus fund had an effective duration of 6.2 years as of December 31, 2023. In the three-year rising-rate period that ended December 31, the Morningstar Core Plus category average delivered an annualized return of -3.22%.1 Over the same period, the 10-year Treasury note, which, unlike the core plus category, isn’t exposed to credit risk, delivered an annualized return of -5.93%.2

These performance results indicate the duration component of the average core plus fund dominated the credit components. The credit components only slightly supported investors during the duration-led return drawdown. This wasn’t ideal for investors who largely expected their fixed-income allocation to provide diversification and help manage risk.

Yield Has Remained Plentiful Across the Curve

The good news for fixed-income investors is that yields are generally higher across the yield curve. Figure 2 demonstrates how yields of all maturities have increased since the end of 2020.

Figure 2 | Yields Are Higher for All Maturities

U.S. Treasury Curve
Line chart showing the U.S. Treasury yield curve over several different maturities.

Data as of 3/31/2024. Source: FactSet.

Given this backdrop, we have found ample opportunities to pursue return and yield without stretching to core plus-like duration levels. Our research suggests that average bond yields could remain higher over the next 10 years than during the 10 years following the financial crisis. As a result, we expect to see more opportunities to enhance return and yield potential than in the prior low-yield environment.

But with the Fed approaching an inflection point — and given the normal course of economic and financial cycles — we also expect interest rates to be volatile. Accordingly, opportunities across fixed income will likely be changing, perhaps quickly.

Spotlight Shines on Securitized Sector

For example, we have recently found more value in the securitized sector than in the corporate credit and government bond sectors. We believe we have uncovered high-quality asset-backed securities with attractive characteristics versus the Bloomberg U.S. Aggregate Bond Index, potentially creating a better outcome for investors.3

In our view, the more constrained opportunity set of benchmark-focused core plus strategies has led to a subpar experience for investors. We believe investors should consider a more dynamic fixed-income strategy not beholden to benchmark characteristics.

Multisector Income: A Nimble, Diversified Option for Today’s Market

American Century Multisector Income pursues a highly dynamic approach, diversifying risk across fixed-income sectors and the credit and duration spectrums. The portfolio isn’t bound to the Bloomberg U.S. Aggregate Bond Index’s total duration. The portfolio’s typical duration has been three to five years, well below the index's typical range of five to seven years.4

We take a highly disciplined approach to risk-taking, investing only where our conviction levels are strongest on a relative basis. This strategy strives to deliver higher returns than the Morningstar Core Plus category average with less return volatility.

The Flexibility to Emphasize Opportunities and Avoid Potential Pitfalls

Absent benchmark constraints, we can also tailor credit exposure based on what we believe are the market’s best opportunities. For example, we may avoid less compelling sectors with unattractive risk-adjusted return potential, even if the index holds them. Figure 3 depicts how the portfolio’s investment mix has changed over the years.

Figure 3 | Active Sector Rotation Reflects Managers’ Convictions

Multisector Income Sector Allocation
Area chart showing how American Century Investments' Multisector Income Mutual Fund's sector allocation has changed over the past 10 years.

Data for all charts as of 12/31/2023. Source: FactSet. Performance in USD, I class shares. Periods greater than one year have been annualized. Past performance is no guarantee of future results.
High-yield refers to corporate bonds with below-investment-grade credit ratings; investment-grade corporates refer to corporate bonds with credit-quality ratings of BBB or higher; securitized refers to U.S. government agency and non-government mortgage- and asset-backed securities; emerging markets debt refers to government, quasi-government and corporate securities issued in developing countries; government & cash refers to U.S. Treasury and cash-equivalent securities.

Many of our peers have single-sector specialization.5 For example, some may be securitized specialists, while others focus on corporate bonds. In our view, these concentrated skill sets translate to more static and less diversified portfolios.

Conversely, we believe our depth and breadth of cross-sector capabilities highlight various opportunities across the broad fixed-income landscape. Conviction dictates our sector weightings, and we emphasize those we believe have more attractive return potential and risk characteristics.

We believe that taking excessive risks to earn excess yield only brings excess volatility to portfolios. Instead, we manage credit exposure to potentially capitalize in up markets and temper volatility when credit risk is out of favor.

Keeping Liquidity in Focus

We also understand the importance of portfolio liquidity. For many investors, fixed-income allocations may serve as a source of liquidity.

Accordingly, we don’t purchase private credit, we limit opaque derivatives in the portfolio, and we don’t employ leverage. When funds engage in these practices to amplify yield, they also amplify risk and illiquidity. These tactics are unnecessary, in our view.

Accordingly, our goal is for Multisector Income to deliver a solid all-weather fixed-income asset allocation solution.

Balaji Venkataraman
Balaji Venkataraman

VP, Client Portfolio Manager

Investing for Income

Explore strategies designed to generate income potential while focusing on tempering risk exposure.


Morningstar. Past performance is no guarantee of future results.


FactSet as of 12/31/2023. S&P U.S. Treasury Bond Current 10-Year Index. Past performance is no guarantee of future results. It’s not possible to invest directly in an index.


American Century Investments research, as of 1/18/2024.


American Century Investments, data from 8/31/17-12/31/23.


American Century Investments peer group research as of 12/31/2023.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

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