The sharp rise in bond yields this year has inflicted losses on fixed income investors but also created “one of the most compelling opportunities in years”, according to Morningstar.

Yields have climbed sharply this year with the 10-year US Treasury yield hitting a multidecade high of 5.3%, up from 4.2% at the start of the year.

This has weighed on global fixed income funds, especially those positioned in longer duration and government bonds.

But despite the recent volatility, Morningstar senior analyst Arvind Subramanian said that higher starting yields offer a far bigger cushion against further price falls than investors had in 2022, the last major bond sell-off.

“Fixed-income funds haven’t really delivered the stability investors expected in recent quarters, but higher yields have changed the picture considerably,” he said in a recent report.

“With several flexible bond funds now offering portfolio yields of around 6.5% to 8%, the starting point looks much more attractive. Choosing a good active manager with the flexibility to adjust credit and duration positioning could serve investors well.”

According to Morningstar, portfolio yields across most bond categories sit at multi-year highs.

For example, the Pimco GIS Income, the largest fund in Morningstar’s global flexible-bond category, had a yield to maturity of 8.4% at the end of September, up from 6.3% at the start of 2026 and 3.8% at the start of 2022.

Higher yields also bolster bonds’ diversification role, the report added. If growth slows or inflation fears ease, bonds could gain while providing ballast against stock markets trading at rich valuations.

Opportunity for active management

Morningstar also made a case for active management, citing studies which show active bond managers have reasonably high success rates against passive funds, helped by credit selection and nimble duration calls.

Active funds also fare better in broad diversified and corporate bond categories than in single-country government bond mandates, the report said.

However, the report warned against stretching for income: “amid higher yields, it can be tempting for investors to take on more interest rate risk than they perhaps should”.

Although the 30-year Treasury yielded close to 5.5% in early October, against 4.9% on the five-year, longer-duration funds are more volatile and could lose more if yields rise further, the report flagged.

The report also warned against taking on excessive credit risk: “much of the rise in high-yield fund yields reflects higher risk-free rates rather than wider credit spreads,” it said.

Many portfolio managers still see credit spreads as excessively tight, according to Morningstar. The global high-yield category’s average portfolio yield of about 7.2% sits near the median of its five-year range, so current yields may not adequately compensate for the credit risk, the report said.

Rather than trying to time the peak in yields, Morningstar suggested investors focus on well-run funds, pointing to the US dollar and global flexible-bond categories, whose managers have more tools across credit and duration.

It singled out five gold rated funds available for investors in Hong Kong, Singapore or Taiwan: BGF Fixed Income Global Opportunities, Capital Group Global High Income Opportunities, JPM Income, Jupiter Dynamic Bond and Pimco GIS Diversified Income.