The cost of income

Why it’s cheap again  

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Article Type
BondTalk
Topics
Credit, Rates, Banks, Opinion
Published
April 28, 2026
Read time
8 mins
Author
Colin Finlayson, CFA
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Income is back for fixed-income investors, but the opportunity set looks very different. We explore what’s changed in markets and why short-dated bonds may be in an income sweet spot.  

 

For fixed income investors, the importance of income cannot be underestimated – the clue is, after all, in the name. As the foundation of any investment allocation, it is a key driver of the basic total return calculation: total return = capital plus income. As a result, it never really goes out of fashion.

 

However, much like everything in the investment world, income is not risk-free, and the ‘cost’ of securing it can change. Fortunately for investors today, the opportunity to generate income has rarely been more attractive.

 

The rising cost of income

 

Through the investment cycle, the yield available from bond markets varies, and this determines the level of income investors can access. In the post-Financial Crisis period, central banks favoured ultra-low (or negative) interest rates and quantitative easing (QE). This drove a near-continuous decline in bond yields from 2008 to 2020, forcing income-hungry investors to get creative. Many were compelled to take on additional risk to achieve their income goals, mainly by varying the maturity or credit quality of the bonds they bought.

 

5 year UK Gilts Yield

Source: Bloomberg as at 31 March 2026

 

Theory dictates that yields should be higher on bonds with longer maturities or lower credit ratings, compensating investors for the additional risk. However, this also increases the volatility of the ‘capital’ contribution to returns, which can be viewed as the ‘cost’ of accessing that additional income. For example, longer-dated bonds generally have higher yields, but they also carry greater duration risk. This makes them more sensitive to changes in interest rates, potentially leading to meaningful drawdowns or losses in adverse market conditions.

 

This raises a key question: is the risk of a total return loss too high a price to pay for some additional income?

 

A new yield environment

 

Fast-forward to 2026, and much has changed. The inflation spike of 2022 and the aggressive rate-hiking cycle that followed brought an end to the period of ultra-low bond yields and ushered in a fertile environment for income seekers.

 

Bond yields across the curve reversed their QE-era declines. UK Gilts, for example, are now above their average level since 1990. This higher level of yield has strengthened the foundation of bond returns, providing a greater cushion against weaker market conditions – something that was largely missing for much of the last 20 years.

 

UK Gilt - Yield Curve change

Source: Bloomberg as at 31 March 2026

 

Income without added risk

 

What makes the current situation particularly compelling is that the ‘cost’ of income is low, and the days when investors needed to take on additional risk to achieve that income are gone. The repricing in fixed-income markets has caused sharp rises in bond yields across the curve, meaning that, for many investors, their income needs can now be met through short-dated corporate bonds, without taking on any additional duration risk.

 

As the table below shows, corporate bonds with a maturity of less than five years can provide a yield of 5.28%, while maintaining relatively low risk – both in terms of duration and credit quality.

 

Compare this to longer-dated corporate bonds (15+ years). While the yield is higher at 6.44%, the level of duration risk is almost five times greater.

 

Source: Bloomberg as at 31 March 2026

 

In other words, higher yield but at a much higher ‘cost’. When compared to shorter-dated bonds, the additional income is not worth the additional risk – same asset class, same credit quality, but lower income per unit of duration risk.

 

Using this useful metric, the income for each unit of risk from short-dated corporate bonds is more than double that of other maturities. This attractive yield level also underpins the defensive qualities of short-dated bonds. If bond markets sell off, the income provided can help offset any capital losses.

 

Income and total return – why starting yield matters

 

Total Return = Capital Return + Income

Being paid an attractive yield but experiencing a total return loss is sub-optimal for many investors.  A more resilient approach is to structure portfolios so that a greater proportion of total return is driven by income rather than by changes in overall market direction.  What this means is, the higher the starting yield, the more a portfolio’s total return is ‘protected’ against adverse market moves.

 

Short-dated bonds are ideally placed to provide a more ‘defensive’ income opportunity. Their lower duration means they are less sensitive to changes in interest rates, allowing them to provide a more defensive source of income. Looking again at the example of corporate bonds across different maturities above, the impact of a 1% (100bp) rise in yields varies significantly by maturity.

 

What stands out is that bonds with 1-5-year maturities are the only category that would deliver a positive total return, while longer maturities experience losses of up to 6%. In fact, yields on 1–5-year bonds would need to rise by more than 2% (200bps) before total returns turn negative.

 

For investors focused not only on income but also on preserving total return, this highlights a clear advantage of short-dated corporate bonds: a more defensive income stream with greater protection against rising yields.

 

A compelling income opportunity

 

Today’s fixed-income landscape has changed immeasurably from the zero-interest-rate world of the past. The current elevated yield levels within traditional fixed-income markets can now meet many income requirements without taking on additional credit or duration risk or compromising liquidity.

 

Within this, short-dated corporate bonds are in a ‘sweet spot’, where the level of income and the protection that offers to total returns is particularly compelling.

 

Income does not come for free, and the degree of risk must always be considered.

 

Today, however, that ‘cost’ has rarely been more attractive.

 

To find out more please visit: www.aegonam.com/income2026

 

 

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Author

Colin Finlayson, CFA
Portfolio Manager
Colin Finlayson, portfolio manager, is a member of the global rates and multi-sector portfolio management teams.
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