Opportunities in Core Fixed Income for Insurers

Insurance companies face a rather peculiar fixed income environment, given uncertain expectations for (potential) interest rate cuts, as well as concerns about spreads and yields. We spoke with IR+M to discuss where insurers might find opportunities for improvement within the various fixed income sectors.

Rob Lund, CFA | Head of Consultant Relations and Insurance Solutions | Income Research + Management
rlund@incomeresearch.com | Learn More >>

SAA: What fixed income sectors or structures offer the most attractive risk-reward tradeoffs amid current volatility and macro uncertainty?

IR+M: The U.S. fixed income landscape remains dynamic, shaped by ongoing volatility, fiscal imbalances, and elevated Treasury issuance. As government-backed securities continue to represent a substantial portion of broad market indices, institutional investors may benefit from exploring high-quality alternatives that enhance diversification and improve portfolio efficiency.

With corporate credit spreads still trading inside of their long-term averages, we see relative value in securitized credit, particularly in asset-backed and mortgage-backed securities. Non-traditional ABS sectors—such as Whole Business Securitizations, Utility Fee Securitizations, and Cell-Tower ABS—offer compelling capital-adjusted return profiles and can serve as effective diversifiers. Senior tranches of collateralized loan obligations (CLOs) remain attractive due to their structural resilience, rating stability, and low probability of principal impairment. Within the commercial mortgage-backed securities (CMBS) space, we favor senior conduit tranches backed by diversified pools across property types and geographies. Depending on deal structure, these instruments can offer a yield premium over similarly rated corporate bonds, while mitigating idiosyncratic credit risk.

Given strong credit fundamentals and recently elevated Muni/Treasury ratios, municipal bonds can also present a compelling opportunity for insurance companies and other taxable institutional investors seeking to enhance after-tax returns. The sector’s historically low default rates and low correlations with other fixed income asset classes make municipals a valuable tool for portfolio diversification in a volatile market.

Lastly, the recent uptick in convertible bond issuance presents a timely opportunity for insurers to allocate to an asset class that has historically delivered attractive capital-adjusted returns. Convertibles benefit from favorable bond-like capital treatment, making them particularly well-suited for insurance portfolios seeking efficient use of statutory capital. This unique structure offers a compelling combination of downside protection and upside potential. The bond component supports capital preservation and provides predictable cash flows, while the embedded equity option allows investors to participate in market appreciation.

SAA: How should insurers consider liquidity needs in preparation for potential rate regime shifts or credit cycle deterioration?

IR+M: With the potential for additional rate cuts on the horizon, insurers may find strategic value in leveraging the current interest rate environment to lock in higher book yields while opportunities persist. For insurers with sufficient balance sheet flexibility to realize losses, this may be an opportune time to reposition portfolios and reset book yields at more favorable levels—enhancing long-term income potential in a declining rate scenario.

In today’s credit markets, spreads remain compressed and dispersion across issuers is limited, underscoring the importance of bottom-up security selection. Robust credit research is essential to identify issuers with lower exposure to macroeconomic risks such as tariffs and global growth pressures. Current valuations also present an opportunity to upgrade portfolio quality and improve liquidity. Increasing allocations to high-quality, liquid sectors may position insurers advantageously should market dislocations occur—enabling them to deploy capital when spreads widen and relative value becomes more compelling.

SAA: How can active fixed income management add value in an environment of compressed spreads and reduced dispersion?

IR+M: In today’s environment of compressed spreads and limited issuer dispersion, security selection remains a critical lever for generating excess returns. Rigorous bottom-up credit research enables active managers to identify securities with strong fundamentals, and favorable structural features. Security selection also allows for precise relative value analysis across the yield curve for each issuer. For example, technical demand in the long end has driven long-duration corporate spreads to historically tight levels, making shorter-duration corporate bonds comparatively more attractive from a risk-adjusted perspective.

Beyond traditional corporate credit, active managers can uncover compelling opportunities in securitized markets. Sectors such as Agency and Non-Agency MBS, ABS, and CMBS continue to trade at more favorable levels relative to long-term averages. These areas are often underrepresented in standard fixed income benchmarks, yet offer meaningful diversification and income potential for investors with the research capabilities to evaluate varied collateral types.

As relative value dynamics shift, the ability to actively allocate to better-compensated subsectors can enhance portfolio income and total return potential over time—particularly for insurers seeking to optimize capital efficiency and maintain flexibility in volatile markets.

Source: Bloomberg as of 8/14/25 unless stated otherwise. Chart 1: Government-Related Weight includes Treasuries, Agency, Agency MBS and Agency CMBS sectors within the Bloomberg Aggregate Index as of 3/31/25. Chart 2: Bloomberg as of 7/31/25. Each category based on Bloomberg Indices (Short = Bloomberg 1-3yr Corporate Index, Intermediate = Bloomberg 3-10yr Corporate Index, Long = Bloomberg Long Corporate Index, Bloomberg US High Yield Index, Bloomberg US MBS Index, Bloomberg ABS Index, and Bloomberg CMBS Index, respectively). Percentiles calculated using monthly spread and yields going back 20 years. It should not be assumed that the yields or any other data presented exist today or will in the future. The views contained in this report are those of Income Research + Management (“IR+M”) and are based on information obtained by IR+M from sources that are believed to be reliable but IR+M makes no guarantee as to the accuracy or completeness of the underlying third-party data used to form IR+M’s views and opinions. This report is for informational purposes only and is not intended to provide specific advice, recommendations, or projected returns for any particular IR+M product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Income Research + Management. This is not a recommendation to purchase or sell any of the securities or issuers in sectors listed above. “Bloomberg®” and Bloomberg Indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by IR+M. Bloomberg is not affiliated with IR+M, and Bloomberg does not approve, endorse, review, or recommend the products described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to any IR+M product.

Source: Strategic Asset Alliance, Income Research + Management. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of information cannot be guaranteed.