Yields: One Term, Many Meanings
First, let’s talk about yields. This is where the discussion often starts because the word yield is where confusion often develops. People throw the word around in many phrases: “this is what my bond fund yields,” or this is the “yield to maturity we see right now.” Between the multiple ways investors use the word and the many different yield measures that exist (yield to worst, yield to maturity, 30-day SEC yield, etc.), it’s easy to see how the potential for mixed signals can create pain points in client conversations (see yield definitions in FIGURE 1).

So, consider starting at the beginning. Yield is defined as the return you get based on the capital you invest. It’s as simple as that—or, at least, it should be.

In bond land, the terminology gets tricky because clients often refer to a bond’s regular coupon payments as their bond yield. They may not realize that fluctuating interest rates and spreads² will change the value of bonds at any given moment. You can explain that bonds trade at a premium when the bond’s coupon is higher than the prevailing level of rates; and they trade at a discount when the bond’s coupon is lower than the prevailing level of rates. You can further explain that, depending on the price you paid for your bond (i.e., at a premium or a discount), the yield will be a combination of that difference from par combined with the coupon. 

So, what does it look like today? Since coupons are higher, your clients might think they should be getting higher monthly payments from their bond fund. Should they? Well, yes—but maybe not as high as some measures of yield are quoting.  

For instance, yield to worst (YTW) is the lowest potential yield that can be received on a bond without the issuer defaulting. It’s calculated by making worst-case scenario assumptions on the issue by calculating the returns that would be received if provisions, including prepayment, call, or sinking fund, are used by the issuer. 

The YTW on the Bloomberg US Aggregate Bond Index (the “Agg”)³ was 4.86% as of 1/31/25. However, the average coupon of the more than 13,000 bond issues that make up the Agg was 3.45%. Furthermore, the five largest passive core-bond ETFs managed to that Index paid, on average, a 4.15% distribution, which falls between the average coupon and YTW. Fees were not an issue as each only charge 3 basis points.⁴ So, where is the other 1%+?

When an investor who seeks monthly income streams raises the question of expected yield, it may be best to rephrase the question as one of expected distributions.

Yield Now vs. Yield Later
The 1%+ difference is caught up in the discount. The missing yield isn’t coupon income but, rather, capital-appreciation potential created after the historic back-up in rates. The average bond price of the Agg as of 1/31/25 was $90.70 vs. par of $100. As a bond gets closer to maturity, its value accretes closer to par. Generally, but not always, the accretion isn’t physically paid from a bond fund until a bond matures or is sold. In a bond fund, despite not being paid monthly, the value of the overall net-asset value (NAV)⁵ should be increasing as the bonds accrete, enabling holders of the fund to monetize it that way if they choose.  

So, the actual distribution that an investor receives may look similar to the average coupon, but the expected “yield” is really a combination of the coupon plus potential capital appreciation and may not be indicative of what the investor will be paid regularly. This can be confusing and necessitates an up-front conversation concerning the investor’s goals. 

When a client who seeks a monthly income stream raises the question of expected yield, it may be best to rephrase the question as one of expected distributions. Oftentimes, by separating the two components—distributions received and capital appreciation potential—you can help clarify the distinction in an investor’s mind. On the flipside, for clients who seek total return, YTW is likely the most appropriate yield to quote. 

Yields and Rising Rates
This often leads to another question: How long does it take to recognize YTW? While there’s no guarantee of recognizing the expected total return, the actual speed of the return is going to vary with changes in rates. A sharp decline in rates means a quicker recovery in the discount to par, thereby lifting the price of the NAV—all things being equal.

Rising rates means it will likely take longer to recover to par. While YTW is an annualized figure, perhaps the best proxy (although certainly not as precise) is the years-to-worst calculation, which is the total length of time during which the owner will receive interest payments on the investment while assuming the worst-case scenarios for bonds to be called or prepaid.

So, given these various yield measures and the different meanings and nuances around this concept, what’s the best yield to quote and when? 

We consider fixed income to be a long-term, strategic holding that should give investors ample time to experience higher yields.

Bottom Line
Despite being two years removed from the turmoil of 2022, we believe attractive total-return opportunities remain. The current moment in time could make for a solid entry point for many investors, but this may not yet be reflected in their monthly or periodic payouts. 

We consider fixed income to be a long-term, strategic holding; this approach should give investors ample time to experience these higher yields. It’s important to speak to clients up-front about what they expect from their fixed-income allocation, whether it be total return or income, and how the components work together. Having this discussion before a fixed-income allocation is made can help ensure you and your clients are on the same page.