Managing uncertainty in fixed income

August 06, 2025
  • Capital Partners
Fixed Income Product Specialist Tom Brennan explores how we approach managing fixed income portfolios in all environments – even uncertain ones.
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One reason our clients invest in fixed income is for the stability it can provide. Yet fixed income managers are often faced with decisions affecting this level of stability. How do we at BBH manage fixed income to provide stability while leveraging volatility as an opportunity?

The fixed income markets feel like they have been at the center of many uncertainties this year. Interest rates moved higher since “Liberation Day” on April 2, 2025, despite mounting concerns of an economic slowdown – an environment where interest rates tend to decline. This has happened as tariffs interact with ongoing inflation concerns and U.S. fiscal budgetary deficits. These forces drove Moody’s to downgrade the U.S. government’s credit rating to Aa1, joining the other major rating agencies in assigning the U.S. government’s credit rating one notch below the highest possible level of Aaa.

By any measure, this has been an eventful environment for capital markets. Our goal at BBH is to deliver a performance experience that limits unexpected movements in fixed income portfolios. One way to achieve this objective is to maintain a consistent investment process amid elevated volatility and uncertainty. Here, we shine light on how we approach these decisions in all environments.

A bond is a bond, right?

Several decisions can impact how a fixed income portfolio performs. For example, a portfolio’s positioning regarding duration, yield curve exposures, credit decisions (whether to invest in opportunities that carry default risk), credit quality and repayment risks, and tax considerations all affect a client’s return from fixed income. Performance experiences are determined by how these risks are managed, singly and jointly. Many of these characteristics can be measured quantitatively, while others require subjective, professional judgment.

We believe that some risks can be measured and managed consistently to raise the likelihood of favorable outcomes. Other risks, despite offering the potential for higher return outcomes, are more speculative in realization. Taking a holistic and collaborative approach to understanding our clients’ goals and objectives for their fixed income investments, we separate the process into strategic and investment decisions.

Several fixed income risks, such as interest rate duration, are difficult to manage tactically and are best guided by strategic decisions. Our relationship managers partner with clients to understand their overall objectives, risk tolerance, and situational dynamics. This helps us determine the balance to strike among the various roles fixed income can play, including stability, diversification, liquidity, and income. We then manage portfolios by carefully selecting individual credits subject to a duration target and caps on credit allocations.

We believe this generates benefits for both our clients’ outcomes and our investors’ ability to navigate market dynamics. Our clients can rely on dependably getting the exposures aligned with their strategic objectives rather than worrying if we are on the right side of a trade. Strategic alignment affords our investment team the ability to focus on generating performance consistently from credit selection decisions.

Our fixed income team focuses on executing this well-established process. As mentioned, our clients’ overall duration, credit quality parameters, and liquidity profile are determined before the team makes any investments. The team then searches the $50 trillion universe across more than 80,000 potential issues to find those most suitable for our clients’ expressed objectives.

We seek to optimize performance through combining a valuation discipline with credit criteria aimed at identifying durable investments that can perform through a variety of environments, not just a favorable one."

In past articles, we spoke about the pillars of the approach we follow. We seek to optimize performance through combining a valuation discipline with credit criteria aimed at identifying durable investments that can perform through a variety of environments, not just a favorable one. We aren’t investing in anticipation of a particular macroeconomic condition.

  • Our valuation framework1 balances the uncertainties inherent in investing with appropriate risk compensation. The framework provides us with an objective guide to whether an investment’s return potential merits further research work from the team. It integrates an investment’s known default likelihood, optionality, and liquidity alongside the mean-reversion tendencies of credit spreads, and then requires a margin of safety2 for each investment. We believe that incorporating that margin of safety puts the odds of success on our clients’ side by providing protection against both credit uncertainties and price volatility.
  • Our research focuses on durable opportunities. Numerous factors affect our decision-making process during environments of uncertainty. Focusing on durability requires analysts to consider how the investment might perform under a broad range of scenarios, including the worst environment previously faced by its industry. We don’t position for those scenarios or potential macro downturns we cannot predict; rather, we aim for portfolios that will ultimately be resilient to any downturn. This allows our team to put a currently volatile environment into a broader context. For example, is the current environment really worse than our modeled worst-case scenario? And do we still believe the company has the business model and adequate strategic options that made it resilient in our modeling?

Other elements of our approach also help us navigate episodes of uncertainty. Our team-based decision-making approach ensures the widest range of perspectives are considered before approving an idea for investment, leveraging the diverse experience of our credit team. Having a team-based approach across the entire fixed income franchise allows us to bring our collective best thinking to client portfolios.

Putting it all together: Process over predictions

We frequently say that volatility is a feature of a market – not a bug. And our fixed income process was designed so that portfolios perform through volatile periods. Amid uncertainty, volatility tends to exceed the underlying fundamental risks, creating investment opportunities. We do not make investments in securities that require a predicted outcome to occur for a successful investment. Instead, we follow our bottom-up approach to ensure that our clients’ strategic fixed income goals are met as we adapt to the opportunity set at hand. This way, we can allow process over predictions to drive our client’s performance journeys, regardless of the environment.

To learn more about fixed income investing at BBH, reach out to your relationship team.

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1 Our valuation framework is a purely quantitative screen for bonds that may offer excess return potential, primarily from mean reversion in spreads. When the potential excess return is above a specific hurdle rate, we label them “Buys” (others are “Holds” or “Sells”). These ratings are category names, not recommendations, as the valuation framework includes no credit research, a vital second step.

2 Margin of safety: when a security meets our investment criteria and is trading at meaningful discount between its market price and our estimate of its intrinsic value.

Past performance does not guarantee future results.

Opinions, forecasts, and discussions about investment strategies are as of the date of this commentary and are subject to change without notice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations.

Diversification does not eliminate the risk of experiencing investment losses.

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