The era of low yields and the investment challenges they bring isn’t likely to end soon. Ongoing geopolitical tensions and slowing global growth will contribute to persistently low and negative yields in 2020. A global slowdown could leave the world even more vulnerable to adverse shocks, leading to further bouts of volatility.

Fixed-income investors seem caught between a rock and a hard place.

Government bonds offer some downside protection, but with global yields near record lows, the protection feels thin, and the income stream may be inadequate.

On the flip side, higher-yielding credits can boost income but are also more volatile, especially when credit spreads are below historical norms, as they are today. That doesn’t appeal when credit cycles are long in the tooth.

Can investors can find a happy middle ground?

The Whole Is Greater than the Sum

When it comes to income-oriented investing, we’ve long advocated a single dynamic strategy that pairs return-seeking credit assets—high-yield corporate bonds, emerging-market debt and so on—with high-quality government bonds.

Such an approach has historically been a good way to generate income while limiting drawdowns, making it particularly valuable late in the credit cycle. This is mainly because the return streams tend to be negatively correlated. One does well when the other struggles, and a manager can alter the weightings as valuations and conditions change.

This effectively allows the investor to reduce volatility without giving up too much return. To see what we mean, let’s look at a couple of potential strategies.