Fixed income, often referred to as bonds, can be seen as the quiet engine of a balanced investment portfolio. As an asset class, bonds are a core building block that has the potential to bring both stability and resilience.
At its heart, fixed incomeFixed incomeAn investment that pays a fixed amount of interest like a bond and typically aims to preserve capital. read more is simply about lending money and being paid interest in return. Understanding how this works helps explain why bonds continue to play an important role in long term portfolios, particularly for investors who want both financial resilience and positive, real world impact.
In recent years, the performance of sustainable-focused bonds has been more closely aligned with the broader bond market than has been the case in equitiesEquityThe universe of traded company shares. Investments can fluctuate according to market conditions, the performance of individual companies and that of the broader equity market. read more (or “stocks”).1 In fact, we’ve observed that it’s been possible to consistently outperform the wider bond market, whilst following an impact-focused process.2
We’ve previously explored the impact opportunities within fixed income: Driving impact through fixed income. Here, we look closer at how the asset class works in practice – what bonds are, the different types available, and the risks involved. We also explore the role bonds can play within a portfolio, how they respond to inflationInflationThe rate at which prices increase over a period of time. read more, and how they can provide access to opportunities beyond traditional stock markets.
What is fixed income?
When buying a bond, you’re lending money to an organisation. That organisation might be a company, a government, or an international institution. In return for the loan, the borrower agrees to pay you interest at regular intervals and to repay the original loan amount at a set point in the future.
Think of it as a structured agreement between lender and borrower. An investor provides the initial loan, often called the principal. Over the life of the bond, the borrower makes scheduled interest payments, commonly once or twice a year. At the end of the agreed period, the borrower returns the principal along with the final interest payment.
Most corporate bonds run for several years, often between three and seven. During that time, investors receive a predictable stream of income, which is where the name “fixed income” comes from.
Different types of bonds
Not all bonds are the same. One of the main ways they differ is by who’s borrowing the money.
Governments issue bonds to fund public spending. Companies issue bonds to invest in their business and support future growth. International institutions, such as development banks, often issue bonds to finance projects that address social or environmental challenges.
At Tribe, we tend to focus on corporate and supranational bonds. These areas often provide opportunities to support businesses and organisations actively working to solve global challenges.
Another difference between bonds is the credit quality of the borrower. Independent rating agencies assess how likely a borrower is to repay its debt. Bonds with stronger credit ratings are generally seen as safer, while lower rated bonds offer higher potential returns to compensate for greater risk.
Understanding the risks
Like any investment, bonds carry risks. The most important one is the possibility that a borrower cannot repay its loan. This is known as default risk.
Credit ratings help investors judge this risk, but they’re only one part of the picture. Bond investors spend significant time analysing what could go wrong for a borrower, from economic changes to shifts in company performance.
One important feature of bonds is their place in the capital structure of a company. If a company fails, those it owes money to are repaid in a specific order. Bondholders are usually higher up this list than shareholders. This means bond investors often have a stronger claim on company assets if something goes wrong.
In some cases, bonds are also backed by specific assets, which can provide an additional layer of protection.
The role bonds play in portfolios
For many decades bonds have played a balancing role in investment portfolios. Historically, their returns have often moved differently from stock markets. This means they can help cushion portfolios during periods when equities struggle.
This relationship does not hold every year. For example, both stocks and bonds struggled in 2022 as inflationInflationThe rate at which prices increase over a period of time. read more surged and interest rates rose rapidly. Even so, bonds have often helped reduce overall portfolio volatility over longer periods.
There is another important difference between bonds and stocks. With stocks, the upside is theoretically unlimited if a company grows strongly. With bonds, the return is defined in advance. Investors receive interest payments and the return of their principal, assuming the borrower does not default. Because of this structure, bond investors focus strongly on preserving capital and managing risk.
Access to opportunities beyond stock markets
The bond market is also far broader than many investors realise. A large and growing number of companies are not listed on stock exchanges, meaning their shares cannot be bought by public market investors. Yet many of these companies still issue bonds.
This opens the door to investment opportunities that don’t exist in equity markets. It also means bond portfolios often contain a wider range of issuers and sectors.
For impact investors, this diversity is particularly valuable. Bonds can be structured in creative ways that link financial returns to real world outcomes.
In one outcomes-linked bond example, the return on a bond increases as a project restores the Amazon rainforest. As more forest is restored, more carbon removal units can be generated and sold to companies seeking to offset emissions. The financial performance of the bond therefore moves alongside the environmental progress of the project.
The role of inflation
No conversation about bonds is complete without discussing inflationInflationThe rate at which prices increase over a period of time. read more. Inflation reduces the purchasing power of future income. Because many bonds pay a fixed rate of interest, higher inflation can make those payments less valuable in real terms.
This dynamic was clearly visible during the inflation surge of 2021 and 2022, when rising prices and interest rates caused bond markets to fall sharply.
Since then, inflation has gradually moved closer to central bank targets and bond markets have recovered. When inflation is stabilising and interest rates begin to fall, bonds often benefit.
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Looking ahead
Today the outlook for bonds appears balanced. Inflation remains above long term targets but is generally moving in the right direction. At the same time, the global economy has remained resilient despite periods of uncertainty.
This environment can be supportive for fixed income investors. Bonds continue to offer regular income, diversification within portfolios, and access to a wide range of investment opportunities.
For impact investors, they also provide a powerful channel for change. Capital raised through bonds can finance renewable energy, nature restoration, social infrastructure, and many other initiatives that support a more sustainable economy.
