Home / Fixed Income / Rehabilitating duration: the hidden strength of fixed income

For much of the last decade, fixed income has been the dinner guest that no one wanted to sit next to. Low yields, scarring losses, and correlation breakdowns left duration firmly out of favour. But, argues Haran Karunakaran, Investment Director at Capital Group, that sentiment may be both outdated and dangerously misaligned with the realities of today’s market.

Fixed Income

Speaking at the Investment Leaders Forum in Byron Bay, Capital Group’s Haran Karunakaran made a detailed and persuasive case for why it’s time for investors to reconsider duration – defined loosely as exposure to interest rate sensitivity – not as a risk, but as a strategic asset.

His opening metaphor was revealing. Asked how advisers usually respond to a fixed-income pitch, he quipped: “They all get up and reach for their coffee.” The aversion is real. But so is the opportunity. “Broad global credit markets have returned nine per cent per annum over the past two years,” he said, referring to benchmarks across investment-grade, high-yield, and securitised assets. That’s not the return profile of a fading asset class. That’s a comeback.

Karunakaran’s central message was not about chasing yield, though. It was about restoring the role of fixed-income as the defensive backbone of a diversified portfolio. “In an uncertain environment, making sure your defensive allocation is actually defensive is crucial,” he said. In practice, this means a deliberate allocation to fixed-rate, high-quality credit – securities with duration that can provide both income and risk mitigation during market drawdowns.

Much of the negative sentiment toward duration stems from 2022, a year in which both bonds and equities sold off sharply. It was, as Karunakaran noted, the first time in nearly 50 years that this happened. “But that was the anomaly,” he said. “If you zoom out, the historical pattern is clear: in periods of equity market stress, duration assets like government bonds tend to rally.” The slide behind him showed that in all but one of the past five major equity corrections, Treasuries posted positive returns – often, sharply so.

Why does this matter now? Because the yield environment has changed. Central banks have hiked rates significantly, creating a higher starting point for bond investors. This not only lifts income potential, it resets the diversification mechanics that had previously broken down. “With yields higher, the ability for fixed-income to act as a shock absorber is back,” Karunakaran argued. “Duration isn’t something to fear – it’s something to use.”

To explain how to use it, he offered a framework that breaks down the roles fixed-income can play in a portfolio: income generation, capital preservation, and diversification from equities. Term deposits, for instance, offer capital preservation but not diversification. Floating-rate credit offers some yield, but lacks the interest-rate sensitivity that gives bonds their defensive edge. High-quality, fixed-rate credit, by contrast, ticks all three boxes.

Karunakaran pointed to global credit as the “sweet spot” in this configuration. Yields are elevated – currently in the mid-sixes – and the structural depth of the market dwarfs Australia’s more concentrated domestic bond landscape. With over 2,000 issuers compared to Australia’s 100 or so, the global universe offers not just more opportunity, but more variety, particularly for active managers.

The key to unlocking this value, though, lies in research. “At Capital Group, our analysts conduct 20,000 company meetings a year,” Karunakaran said. That depth of engagement allows the firm to move beyond index-level averages and find mispricings, especially in unloved but resilient sectors like pharmaceuticals. That industry, he noted, is trading at spreads near 20-year wides – an unusual discount for a sector defined by steady revenues and defensive earnings.

To stress-test the case further, Karunakaran shared results from Capital Group’s scenario modelling. Even under recessionary conditions – where credit spreads widen significantly – the expected returns for a diversified global credit portfolio remained positive, thanks to the yield cushion and likely rate cuts. “If you remove duration from that scenario, the results flip negative,” he warned. “It’s the duration that provides the ballast.”

For advisers managing multi-asset portfolios, this creates a compelling rebalancing story. Fixed-income isn’t just about returns, it’s about optionality. It gives clients the ability to absorb shocks, preserve capital, and take advantage of dislocation in risk assets without selling at the bottom. “You don’t need to abandon equities,” Karunakaran said. “But you do need to ensure that the other side of your portfolio is actually doing its job.”

And that job, in 2025, looks more attractive than it has in years. With yields normalised, duration restored, and dispersion back in the market, fixed-income is once again a space for strategy – not just storage. Karunakaran’s presentation didn’t try to make fixed-income glamorous. It didn’t need to. It made it useful. And for long-term investors looking for predictability in a volatile world, that may be the most attractive trait of all.