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Fixed income

Backdrop for bond investing remains favorable

July 07, 2025 - 5 min

Higher yields historically have meant higher prospective returns. Today, you can build a core plus fund around 6% income. And that was versus prior to 2022 when that same quality portfolio would yield about 4%. That 2% difference may seem small, but 4% compounded over a seven-year life results in a 30% cumulative return versus 6% compounded over that same life results in a 50% cumulative return. So that 2% annualized difference actually equates to a 20% difference in cumulative return over the time period. So volatility may feel uncomfortable today. But oftentimes, volatility is what sows the seeds of opportunity, even if it's just plain, boring, old income. And we don't think 5% to 6% income is all that boring.

We're really long-term investors. We think through three to five years out. We're looking for strong companies with strong enduring fundamentals. Just because prices are being dragged down today because of macro concerns or uncertainty doesn't mean that we don't have a strong underlying fundamental company to invest in. We're really looking for that detachment. We're looking for prices that are implying that this macroeconomic uncertainty will result in a slowdown in our company in perpetuity.

We saw opportunities in April in ABS securitized, for example. We saw opportunities in investment-grade corporates and high-yield corporates. These were securities that were unfairly mispriced, in our opinion, but whose fundamentals show a continuation of positive trends and thus lower default risk despite the macro uncertainty. When we see that decoupling, that's generally when we're opportunistic as value investors. 

In uncertain and volatile times like today, having an active core-plus manager who is nimble really adds an advantage because they can exploit the opportunity sets that come and go along with the volatility.

Although I don't think it's a long-term structural risk, I do think deficits are a problem that we will need to address as a nation at some point in the future. The good thing is the Treasury has taken some smart steps in managing the maturity structure. They are potentially allowing the banks to lower the cost of capital to hold US treasuries. And probably most importantly, we believe the risk is sufficiently priced into securities today. As for inflation, I don't think it's a structural problem. I think it's a cyclical one. 

We injected a lot of stimulus in 2020, which caused prices to go up significantly. And we're still working through that. Certainly, the tariffs haven't helped. And I think as we work through over the next couple of quarters, you'll see a resumption of the natural trajectory lower for consumer prices.

We continue to prefer cyclicals and consumer-facing companies as areas of opportunity. Why is that? Well, when you have a lot of these macro concerns and uncertainty around tariffs, what tends to happen is that risk gets priced in uniformly across those sectors. Our opportunity is to find companies that are unfairly being dragged down because of macroeconomic concerns, but whose fundamentals remain quite strong. 

Take, for example, a recent MBO of a roofing company backed by a very strong manager who has a history of aggregating industries successfully. The roofing space is ideal because the top three players own about 50% of the market, with a very fragmented tail, making it ripe for consolidation. Day one leverage is high, but management already monetized their stock to pay down debt and thus de-risk the balance sheet. That type of prudent capital allocation is what we look for.

Despite choppy market conditions driven by macroeconomic concerns in the first half of 2025, Head of Fixed Income at Harris | Oakmark, Adam Abbas, finds today’s backdrop favorable for bond investing. In this midyear outlook video, he discusses how today’s higher yields and value opportunities in various sectors of fixed income are offering the potential for attractive returns over the long term.

Key takeaways

  • Higher yields provide income: Current market conditions are advantageous for bond investing, with yields around 6%, compared to 4% prior to 2022. A 2% yield difference can lead to an increase in cumulative returns over time, highlighting the importance of yield in fixed income investments. 
  • Opportunities amid volatility: Bond market volatility can create value opportunities for long-term value investors who have the ability to identify undervalued securities of high-quality companies with strong fundamentals.
  • Active matters: Taking an active, flexible core-plus bond approach helps to exploit the opportunity sets that come and go along with the volatility.
  • Structural risks assessment: For fixed income investors, fiscal deficits and inflation are top concerns in 2025, but they appear to be manageable and already reflected in current bond pricing. 
  • Favorable sectors for the second half: Cyclicals and consumer-facing companies are among attractive areas to find undervalued bonds due to macroeconomic fears of investors. 

The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the views of the portfolio managers as of the date written and are subject to change and may change based on market and other conditions and without notice.

This material is not intended to be a recommendation or investment advice; does not constitute a solicitation to buy, sell or hold a security or an investment strategy; and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances, and in consultation with his or her financial professionals.

All investing involves risk, including the risk of loss. There is no guarantee the Fund’s investment objective will be achieved.

Unlike passive investments, there are no indexes that an active investment attempts to track or replicate. Thus, the ability of an active investment to achieve its objectives will depend on the effectiveness of the investment manager.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Bond values fluctuate in price so the value of your investment can go down depending on market conditions.

Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise, bond prices usually fall), inflation and liquidity.

Value investing carries the risk that a security can continue to be undervalued by the market for long periods of time. Below investment grade fixed income securities may be subject to greater risks (including the risk of default) than other fixed income securities.

Before investing in any Oakmark Fund, you should carefully consider the Fund's investment objectives, risks, management fees and other expenses. This and other important information is contained in a Fund's prospectus and summary prospectus. Please read the prospectus and summary prospectus carefully before investing. For more information, please visit oakmark.com or call 1-800-OAKMARK (1-800-625-6275).

The Oakmark Funds are distributed by Harris Associates Securities L.P., member FINRA.

Natixis Distribution, LLC (member FINRA | SIPC), a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers, is a marketing agent for the Oakmark Funds.

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