Harvesting income opportunities through fixed maturity bond portfolios

Harvesting an attractive income for much of the last decade was challenging as low interest rates and correspondingly low bond yields led to slim pickings. In recent years there has been more abundance, as the rise in yields that took place from mid-2022 saw a return to a more normal yield environment.

But will the higher yields last? It is a question many investors have asked themselves and explains the recent popularity of fixed maturity bond funds. These are vehicles that are designed to help lock in existing yields. A fixed maturity bond fund combines the core features of a single bond (regular predictable coupon and fixed maturity date) with the key benefits offered by a fund (diversification across many bonds, together with security selection and monitoring by investment professionals).

These have proved attractive to investors in recent years and as inflation receded from its cyclical peak investors in shorter-dated bonds have typically benefited from positive real yields (i.e. yields that have been above inflation), helping to maintain purchasing power as seen in Italy, for example (Figure 1). Many fixed maturity bond portfolios are structured with terms of around three years to maturity, so Figure 1 uses asset classes and indices that have relatively short durations (between 2 to 3 ½ years).

Inflation expectations

Inflation in Italy rose early in summer on the back of the fallout from the Middle East conflict but it has since been hovering around 3%. For investors in fixed maturity bond portfolios, the preference would clearly be for inflation not to rise much from here since they would benefit from inflation falling as their fixed yields are more valuable in purchasing power terms.

While the European Central Bank (ECB) has raised rates twice this year to support a return to its 2% inflation target over time, consumers are more sanguine. The ECB conducts a survey of European consumers and in recent months respondents have lowered their expectations for where inflation will be over the next 12 months and the coming three years, with consumers expecting inflation to be below 3% over both time periods (Figure 2).

Rates uncertainty

We have noted before that the ECB was early in responding to higher inflation, with potentially further rate increases to come if energy prices remain high.¹ It is not clear, whether the ECB could be making the same error they made back in 2011, when they raised rates into an energy price spike, only to have to reverse course six months later as the economy slowed. There has already been a recent uptick in Eurozone unemployment.

We also got some more colour around the thinking of Kevin Warsh, the new Chairman of the US Federal Reserve (Fed). At his Jackson Hole speech back in August, he explicitly reaffirmed the Fed’s inflation objective of 2%. More recently, the unanimous decision to raise interest rates by 25 basis points at the Fed’s policy meeting in September demonstrated a firm commitment to control inflation, boosting the Fed’s credibility with markets and removing any doubt about the Fed’s independence on setting monetary policy. While the rate hike will likely contribute to tighter financial conditions, it could actually lead to lower inflation/interest rates beyond the near term.

Corporate strength

One of the most notable factors of recent months has been the strength of corporate earnings. In the US, earnings on the S&P500 (the 500 largest-listed companies in the US) rose 52% year-on-year in Q2 2026. In Europe, the figure was lower but even here earnings were estimated to be up almost 24% in Q2 2026 compared with the same period a year ago.² Higher energy prices are of course problematic, but an assuaging factor is that margins are currently high enough for companies to absorb a fair amount of the pressure. As a result, corporate fundamentals remain supportive for credit investors. However, while the outlook for issuers appears resilient, uncertainty around the future path of interest rates remains.

For investors, the key question then is not only whether corporate fundamentals remain supportive, but also whether current yields represent an attractive level of income to lock in. A fixed maturity bond portfolio is specifically designed to provide investors with a stable and relatively predictable level of income over a set investment period. This naturally involves a trade-off. Should interest rates fall, the income generated by the portfolio is expected to remain steady. Conversely, if rates rise, investors are unlikely to capture the full benefit of those higher market yields.

When evaluating a fixed maturity bond portfolio, investors should consider whether the current yield meets their income objectives over the investment horizon. Provided they are satisfied with that yield, fluctuations in interest rates become less significant, since the investment is intended to maintain an income stream close to today’s levels.

Different approaches, same goal

There are differences though in fixed income maturity portfolios, as there are various ways to construct them. One way is to create a portfolio of corporate bonds with maturities that are close to the maturity date. Another is to create a portfolio of corporate bonds synthetically using government bonds as a base, overlaid with credit default swaps (derivatives that can help generate additional income and offset risk, allowing a portfolio manager to express a view on a corporate bond). Both methods have their merits. The first is less complex but requires careful cash management as the maturity date approaches. The second involves more structuring work but can offer better alignment with the maturity date. Either method is ultimately seeking to deliver a regular level of income for investors.

Credit discipline

In our view, fixed maturity portfolios need to be built around a clear maturity date, income profile and risk budget and not simply be a static basket of bonds. Credit losses could potentially endanger the level of income paid out, so it is important to employ a management team with deep credit expertise and who can respond to changing circumstances. This is where a management team with experience in constructing and managing this type of portfolio is key. A global research footprint can help source the best opportunities, which may mean including high yield alongside investment grade to exploit price inefficiencies and enhance yield. The result is a more selective, conviction-led approach to income generation. In a market where European growth remains uncertain and credit dispersion is likely to persist, this matters to overall performance.

For investors content with current bond yields and keen to have a degree of certainty over the income their portfolio generates and a known maturity date, we believe a fixed maturity bond portfolio may offer a compelling proposition.

¹Source: Bloomberg, World Interest Rate Projections, 16 September 2026.
²Source: LSEG, S&P500 Earnings Scorecard, 28 August 2026, STOXX 600 Earnings Outlook, 27 August 2026.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

High-yield or “junk” bonds involve a greater risk of default and price volatility and can experience sudden and sharp price swings.