Navigating fixed income in a high-inflation era

When inflation is uncertain, interest rates high, and global policy unclear, fixed income is no longer the straightforward anchor it once was. Advisers need to be able to interpret shifting signals across the curve, the credit cycle and geopolitical landscape, and to translate these into resilient portfolio strategies for clients.

According to Pooja Tanna, Head of Fixed Income at Perpetua, today’s market requires a far more deliberate, analytical approach. “Advisers can’t rely on traditional bond heuristics in this environment. Duration, inflation and credit cycles are all moving parts and each one must be assessed actively rather than assumed.”

Start with real yields, not headlines 

A logical starting point is assessing whether investors are being adequately compensated after inflation. Real yields in South Africa are currently elevated, sitting between 3.3% and 4.1% – yet, these must be seen in context.
“When you compare real yields to nominal yields of 7%–9%, the market is effectively pricing breakeven inflation at 4.5%–5.0%,” says Tanna. “For inflation-linked bonds to outperform, inflation would have to surprise materially to the upside – and that already feels priced in. On a relative basis, nominals simply offer better value.” This shift tilts the playing field in favour of select nominal bonds. But the choice isn’t binary; it’s about evaluating the full inflation-risk spectrum.

Treat duration as an active decision

Duration risk has become one of the defining forces in fixed-income strategy. With central banks navigating late-cycle monetary policy, duration now reflects both policy risk and inflation risk. “Duration should never be a default allocation – it’s an active decision,” says Tanna. “Opportunities arise when the market misprices rate hikes or underestimates inflation. Currently, the market looks fairly priced, but pockets of mispricing are always present across the curve.”

The shape of the curve itself is telling. In a typical high-inflation environment, curves should be flattening. Instead, rising fiscal concerns have pushed long-end yields higher in a near-parallel shift. This creates a rare distortion: the front end is anchored to policy expectations, while the back end absorbs supply and fiscal risk. This is where the ‘belly’ of the curve – the mid-maturity segment – becomes attractive. It offers healthy carry and roll-down without forcing advisers to take on excessive long-end risk. “Curve positioning is a major source of alpha right now,” Tanna adds. “The distortions are opportunities.”

A multi-instrument toolkit for portfolio stability

In today’s environment, no single fixed-income instrument can stabilise a multi-asset portfolio. Instead, advisers must view the toolkit holistically.

Government bonds remain the core defensive asset, offering liquidity and protection during risk-off episodes. But their sensitivity to fiscal dynamics and inflation means their role is increasingly tactical.

Inflation-linked bonds offer a crucial hedge. “Inflation uncertainty is now driven more by supply shocks and currency volatility,” says Tanna. “Linkers provide diversification precisely because they respond differently to these shocks.”

Credit, meanwhile, sits between sovereign bonds and equities. Its primary benefit – carry – acts as a stabiliser. But spreads are tight, and in such an environment, Pooja warns against chasing yield. “When spreads compress, the risk is asymmetrical. Even a modest widening can wipe out a year of carry. Quality and shorter spread duration matter far more than headline yield.”

To reduce duration and reinvestment risk, floating-rate and structured instruments become valuable additives. Derivatives such as interest-rate swaps allow advisers to adjust duration efficiently without selling underlying positions.

Credit strategy in a normalising default cycle

As corporate defaults rise from historic lows, the emphasis must shift decisively toward resilience. “Yield is only attractive if it compensates appropriately for default and refinancing risk,” Tanna notes. With spreads likely to widen from compressed levels, she argues for defensible carry anchored in higher-quality issuers, shorter spread duration and exposures with strong structural protections. “Selectivity really matters right now. Incremental yield should come from genuine fundamentals, not superficial spread pick-up.”

Managing reinvestment risk in a turning rate cycle

With bonds maturing into an uncertain rate environment, reinvestment risk is becoming a central concern. Advisers should avoid the temptation to simply roll maturing capital into long-duration assets. “Use the curve actively,” Tanna says. Segments offering superior carry and roll-down may deliver far more value than locking in long-dated yields. And while often overlooked, holding cash remains entirely rational. Cash yields are attractive, and the optionality to redeploy quickly is invaluable as opportunities emerge across the curve.

ETFs and model portfolios

In fast-moving markets, implementation matters. Fixed-income ETFs provide efficient access to global duration, credit and currency exposures, while simplifying liquidity management. “ETFs give advisers a way to adjust positioning quickly without disrupting underlying holdings,” says Tanna. Model portfolios help maintain discipline, enabling managers to blend passive beta with active overlays in duration, curve strategy and credit selection.

Global shifts and their implications for SA investors

Despite global uncertainty, South Africa offers some of the most compelling real yields in emerging markets, which is underpinned by a credible central bank and relatively stable political backdrop. While fiscal risks remain, much of this is already reflected in higher long-end term premia. The rand, when compared with other EM currencies, continues to demonstrate resilience, supported by robust real yields. Global risk-off episodes often hit South Africa disproportionately, but this, says Tanna, creates opportunity. “Volatility is uncomfortable but investable. SA bonds, and even the currency, often become more attractive on the dips.”

The bottom line

In this new fixed-income regime, simplicity is no longer sufficient. Advisers must embrace a multi-dimensional approach that involves balancing real yields against inflation risks, evaluating duration actively, identifying curve distortions, and prioritising credit quality over yield. As Tanna puts it: “Fixed income today is about understanding how every instrument responds to inflation, growth and policy shocks, and using that toolkit to build truly resilient portfolios.”