The nascent global economic recovery, as well as the world’s thriving capital markets, are about to be put to the test as leading economies such as the United States, the European Union and Japan debate how to scale down government stimulus and nudge interest rates back up without derailing the return to growth.

With the outlook for more ‘traditional’ fixed income assets (such as US Treasuries) changing, strategies should move beyond them to explore a broader swathe of the fixed-income universe. Considering the broadest possible opportunity set allows an investor to leverage various markets, industries and currencies to generate performance. This is particularly important because no one fixed income market or asset is a consistent outperformer. Looking at high-yield markets, for example, in 2014 emerging markets trailed the rest; in 2015 the US was the laggard and in 2016 it was Europe. As volatility rises it becomes more important to have the flexibility to turn to different forms of debt.

None of this is to say developed-market fixed income should be ignored. US high-yield bonds had a stellar run in 2017, aided by healthy macroeconomic conditions, corporate tax reform, and the Federal Reserve’s measured approach to interest rate hikes. High-yield defaults in 2018 are expected to remain below their long-term historical average, supported by generally accommodative policy and earnings that are poised to trend higher through the rest of the year.

Nor should an investor’s vision stop at the corporate high-yield market; as conditions change both developed and emerging-market government debt can continue to play a positive role in maintaining the optimal balance of risk and return potential in a portfolio.

In evaluating a fuller range of fixed income possibilities investors should never lose sight of the fact that the asset class houses a variety of risk profiles -- and that macroeconomic or policy changes can impact each differently. Higher-rated bonds, for example, may be better shielded from credit risks, but they too are susceptible to rising interest rates. This is why active management is needed to not only smooth out volatility, but also turn volatility into a potential contributor to performance by increasing allocations to the best-positioned assets at any given point in time, without the obligation to reference indexes or benchmarks.

Particularly in the high-yield sector, performance is intimately linked to individual companies. That means decisions should be made by experienced managers who, based on rigorous analyses of corporate fundamentals, pick out creditworthy firms in the right geographies with a track record of stable income and steady growth over an extended period.

Dynamic allocation that results in a prudent mix of sovereign debt, investment-grade corporate paper and high-yield bonds across the US, Europe and Asia, buttressed by tactical strategies such as allocation to cash when necessary, can help investors not only shield their assets from short-term risks, but ensure that regardless of what volatility throws up, fixed income portfolios are still capable of consistently creating value.