Bonds Are Back: Where to Find Value Ahead of Potential Rate Cuts

Bond Concepts by Madison Investments

The fixed income teams at Madison Investments recently published several white papers that discuss how math in the bond markets has dramatically improved for investors. They also highlighted how the intermediate (1-10 year range) part of the yield curve could be the “sweet spot” amid potential interest rate cuts. In this article, we revisit these arguments and introduce additional insights for our readers.

In this article:

  • Bond math makes a case for bonds
  • Absolute yields
  • Real yields
  • Relative yields
  • Which bonds to target
  • Duration per unit of risk
  • Absolute spread
  • Spread risks
  • And more...

The Case for Bonds

Bond Math Looks Easy

Published in October of last year, near the recent peak in interest rates, we argued that the outlook for bond investors had dramatically improved from just a few short years ago when the Federal Reserve (Fed) was still pursuing its Zero Interest Rate Policy. Back then, a drought of yield available not only robbed investors of any reasonable income on their safe investments but also erased any ability for bonds to act as a hedge against rising rates or falling equity prices. With rates having risen dramatically in the past two years, the “bond math” – from both an income and hedging perspective – is much improved.

Since we published that article last October, intermediate and long-term yields have fallen meaningfully, leaving investors and advisors again asking: do bonds still represent value? In this white paper, we use bond math to argue emphatically - yes.

In addition to bond math, there are other ways to illustrate the notable improvement in the outlook for bond investors and the value bonds can offer in an investment strategy. These include absolute, real, and relative yields.

Which Bonds to Target

Duration per unit of risk

In another white paper we released early this year, “Why Accept More Risk for Comparable Yield?”, we argue that intermediate bonds offer greater value than longer-term bonds, at least from an interest rate risk standpoint. A way to measure this is yield per unit of duration.

As we outline in this and previous articles, the return of yield has presented investors with one of the better opportunities of the past 20 years to invest in fixed income. Given the risk dynamics within the bond market and historical yield curve trends, we argue that the intermediate maturity portion of the bond market offers a superior risk/reward profile compared with longer maturity alternatives. For many investors looking for traditional exposure to the domestic bond markets, we believe now is a good time to invest, and intermediate-maturity bonds have the greatest risk-adjusted potential.


Learn the nuances of fixed income investing, including the risks, opportunities, and investment styles.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

In addition to the ongoing market risk applicable to portfolio securities, bonds are subject to interest rate risk, credit risk and inflation risk. When interest rates rise, bond prices fall; generally, the longer a bond’s maturity, the more sensitive it is to this risk. Credit risk is the possibility that the issuer of a security will be unable to make interest payments and repay the principal on its debt. Bonds may also be subject to call risk, which allows the issuer to retain the right to redeem the debt, fully or partially, before the scheduled maturity date. Proceeds from sales prior to maturity may be more or less than originally invested due to changes in market conditions or changes in the credit quality of the issuer.

Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates. Duration measures how long it takes, in years, for an investor to be repaid the bond’s price by the bond’s total cash flows.

Yield Curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main types of yield curve shapes: normal (upward-sloping curve), inverted (downward-sloping curve), and flat. Yield curve strategies involve positioning a portfolio to capitalize on expected changes.