Intermediate-term bonds, currency-hedged sovereign debt, and global equities offer a compelling combination of yield and resilience.
Investors searching for income faced a scarcity problem for much of the past decade—fixed-income yields were low, while reliable and growing cash flow streams were hard to come by. Higher interest rates have brought new income opportunities, particularly within fixed income, but risks remain: inflation’s bite, tight credit spreads, and elevated equity valuations.
In today’s market, the challenge isn’t simply finding income; it’s trying to make sure that it endures, as we’ve noted in Morningstar’s 2026 Outlook.
Investing with the goal of generating income will always hold appeal for investors. The desire for dependable and predictable income becomes even more important when broad market conditions are uncertain, and some market segments appear overvalued—much like we’re seeing today.
Income can come from a variety of asset classes. Traditional bonds are often front of mind, and current market yields are near or above historical averages, sometimes even enhanced when foreign-currency risk is hedged out. But equities shouldn’t be overlooked. Certain segments of the equity market offer dividend yields that compete with fixed income, with the added potential for capital growth.
Balancing inflation against income, determining the right mix of growth and defensive income-oriented assets, and managing downside risk while preserving the ability for upside are key decisions investors must try to navigate.
Striking a Balance Across Maturities to Maximize Income Potential
When evaluating fixed-income opportunities, it’s important to consider not just yield but also how time affects a bond’s value. Shorter-dated bonds, which are more sensitive to changes in central bank rates, are yielding less than longer-dated bonds. However, longer maturities are more vulnerable to shifts in interest rates, credit risk, and relative-value dynamics across other fixed-income instruments.
Intermediate-dated bonds—those maturing in five to 10 years—look like the sweet spot. They offer yields comparable with cash rates, benefit from capital appreciation as they “roll down the yield curve” toward maturity and stand to gain further if central banks begin cutting rates.
Other Ways Investors Can Enhance Yield
Currency hedging is another critical consideration. For investors whose domestic cash rates exceed those of lower-yielding international markets, hedging foreign-currency risk can boost overall yield while reducing portfolio volatility and adding diversification benefits. This is especially true for US investors today, as currency-hedged global sovereign bonds yield more than US Treasuries.
Historically, income investors have earned higher yields—or “spreads”—over sovereign bonds by taking on additional credit risk, or the increased risk of default associated with corporates. US investment-grade bonds, on average, have offered an extra 132 basis points of yield over US Treasuries while maintaining low default rates. Today, however, that spread sits near historical lows at just over 70 basis points, even as company fundamentals such as interest coverage and free cash flow to debt have deteriorated.
In contrast, US agency mortgage-backed securities look more attractive on a risk/reward basis. With AAA or AA+ credit ratings, MBS currently yield more than equivalently rated credit or US Treasury bonds. While MBS can suffer from the risk of homeowners prepaying their mortgages when rates fall— limiting price appreciation—most US mortgages were underwritten before 2022 at much lower rates, which substantially reduces the likelihood of prepayment today.
High-yield credit remains a popular source of income generation, offering all-in yields around 6.7%. However, spreads are at their narrowest levels in over a decade, and while credit quality in this market has improved, valuations appear stretched.
Our preference is for local-currency emerging-markets debt, where active managers can target the higher-yielding segments. While the average yield on local-currency emerging-markets sovereign debt is around 6.3%, select opportunities can offer all-in yields above 9.0%, with the added potential for currency appreciation.
Best Opportunities for Real Income Yields
While nominal bond yields are appealing, it makes sense to diversify and supplement income sources with select income-focused growth assets—particularly for investors with longer time horizons seeking to preserve real income and offset inflation.
Within equities, the risk of losing capital remains elevated because of valuations; however, two markets stand out: the UK and Brazil. UK equities offer income yields of roughly 4.0%-4.5%, supported by sector exposure to financials and consumer staples and limited representation in expensive technology stocks. Brazilian equities provide even more attractive yields (around 5.0%-5.5%), alongside potential for capital appreciation.
Among traditional yield-focused growth assets, REITs appear more attractively priced than infrastructure assets, where utilities have become more expensive amid increased enthusiasm for artificial intelligence-related energy infrastructure spending. REITs currently offer moderate but compelling dividend yields; however, investors should be mindful of their sensitivity to economic downturns and challenges they face when funding conditions change.
Lastly, it’s important to note that unique opportunities may exist in local markets that offer tax-advantaged income investments. For example, some Australian equities provide superior after-tax income through imputation credits reflecting corporate taxes already paid on company earnings.
The Key? Income Resilience
In today’s market, income generation requires a more dynamic approach.
Intermediate-term bonds offer both attractive yields and the potential for capital gains, while sovereign bonds are regaining appeal as credit spreads remain tight. This is not to say that all-in yields from credit are unattractive, but we own less proportionately than in the recent past and would consider adding in a spread-widening event.
For investors seeking real income yields and inflation protection, UK and Brazilian equities stand out as attractively valued markets. Meanwhile, investors should not underestimate the potential yield pickup that can be achieved from currency-hedging international bonds and other after-tax benefits across different jurisdictions.
Higher fixed-income yields are back, but balance is everything. Those who diversify across the income landscape—while keeping a close eye on valuation and risk—stand the best chance of turning today’s yield offers into lasting and resilient income streams.
