Search for Income | Q4 2017


  • The trend of yield curve flattening continued in the fourth quarter, as short-term yields rose considerably, with more muted moves in longer-term yields.
  • Several LPL Research managed MWP models focus on income generation, including Income Focused, Quad Core: Income, and Franklin Templeton Income.
  • Recommendations for active and passive income suggestions are available from LPL Research’s Recommended List, which includes mutual funds and exchangetraded products (ETP).*

Tax reform progress and ultimate passage during the fourth quarter dominated headlines, sending short-term yields much higher amid increasing expectations for future Federal Reserve (Fed) rate hikes. With longer-term Treasury yields more muted, the Treasury yield curve flattened again over the quarter, and made for a positive month for all major fixed income sectors [Figure 1].

Much like the first three quarters of the year, economically sensitive domestic sectors of the bond market were aided by investors’ ongoing search for income in a low-yield, low-return environment and by steady economic data, which continued to push equity markets significantly higher.

Longer-dated fixed income generally outperformed their shorter-dated counterparts, as the rise in shorter-term Treasury yields outpaced that of longer-dated yields. More economically sensitive, lower-rated sectors tended to outperform higher-quality sectors.

In general, we prefer to look domestically for income-generating investments given the more favorable economic environment in the United States, which may continue to support credit quality. Currently, our best ideas for potential income generation are:

  • High-yield bonds (taxable and tax-free)
  • Bank loans (floating-rate securities)
  • Preferred stocks
  • Investment-grade corporate bonds (intermediate and long-term)
  • Emerging market debt (EMD)

LPL Research has several options available within the Model Wealth Portfolios platform, which combine multiple asset classes and sectors and provide exposure to several of these ideas. The primary goal of these portfolios is to seek excess total return; the secondary goal is to pursue higher overall yields than the LPL Research blended benchmarks.

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The MWP portfolios are exposed to mutual funds and ETPs.

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There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to affect some of the strategies.

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