As any good sailor will tell you, when the tailwinds shift direction and become headwinds, it’s time to pull out the charts and devise a new course to get to your destination.

That’s an apt analogy for income-seeking investors these days as the major central banks in the U.S. and Europe migrate away from an extended period of accommodative monetary policy. Soon enough, both the Federal Reserve and the European Central Bank (ECB) will remove the proverbial punch bowl by shrinking their balance sheets and gradually raising interest rates.

That shift is bound to have a profound impact on both bonds and income-producing equities. Before we look into the risks—and the opportunities—of these shifting winds, let’s gauge how interest rate policies will likely play out over the next 12 months.

A Modest Shift, But Not Without Risks
Central banks are well aware of the risks associated with changes in monetary policy, so they’ll be taking a go-slow approach. The U.S. Federal Reserve, for example, is only expected to raise rates once more in 2017 (in December) and perhaps three times in 2018, according to Mike Foggin, co-manager of the Fidelity Advisor Global Credit Fund (FGBZX).

Even after those moves, “we’ll still be a long way from normal,” says Aaron Anderson, senior vice president of research at Fisher Investments. Like many other strategists, he thinks that central bank-led interest rates will remain below historical averages for quite some time to come. Foggin doesn’t expect the ECB nor the Bank of Japan (BOJ) to raise rates at all in 2018.

But it’s not just benchmark lending rates that are in play. Both the Fed and the ECB will soon start to unwind their balance sheets by selling off some bonds while letting others mature. But the steady buying hand of central banks will surely no longer provide the support that it has (though Japan may keep its foot on the monetary gas for a while to come).

The Fed, the ECB and the BOJ have each bought more than $4.5 trillion in loans in recent years to help keep demand for bonds ahead of supply. It’s not clear that such moves helped to stimulate the respective economies, but they did usher in an era of stunningly low interest rates.

In anticipation of monetary policy shifts, yields have already moved up from the all-time lows, and won’t necessarily rise a significant amount more from here. “A lot of this is already priced in, and the market should be able to cope with a rise in rates as the removal of stimulus is likely to occur over a number of years,” says Angus Sippe, a multi-asset portfolio manager at Schroders.

Scott Service, a portfolio manager for the global fixed-income product team at Loomis Sayles, thinks the yield on U.S. 10-year Treasurys will rise to just 2.75% in the next 12 months. Longer-dated bonds partly reflect inflation expectations, and “we’re seeing lower inflation reports across the globe,” he says. Still, any increase in rates is a negative for bond prices. Bonds with longer duration would feel the greatest pain.

And some strategists see potential risks in the transition from easing to tightening. Noting that the easing cycle has been in place since 2009, “many investors have forgotten how bond markets normally operate,” says Brian McMahon, chief investment officer of Thornburg Investment Management. As for the coming reversal, “nobody knows where this goes because there is no precedent.” He adds that Thornburg is mostly avoiding the bond market these days.

Former Fed chair Alan Greenspan is especially vocal about his bond market concerns these days. “By any measure, real long-term interest rates are much too low and therefore unsustainable,” he recently told Bloomberg News, adding that “when they move higher they are likely to move reasonably fast.”

Sail To The East
Even as domestic and European bonds carry both low yields and the risk of falling prices, Asia and the emerging markets are shaping up to be appealing options for fixed-income investors. PIMCO portfolio manager Alfred Murata, in a written response to Financial Advisor, notes, “We continue to find select opportunities within [emerging markets] given the high real yield differential to developed markets and starting valuations.”

Emerging market bonds may also benefit from more robust price appreciation, according to Scott Service at Loomis Sayles. “Many of these countries had been aggressively raising interest rates until recently, and now they’re in a rate-cutting cycle,” he says, which tends to boost bond returns.

Satya Patel, a portfolio manager at the Matthews Asia Credit Opportunities Fund (MCRDX), likes Asian bonds in particular. “The yields you can get are pretty attractive, and there are a host of positives in place. For example, he notes that the credit for Asian high-yield bonds is currently in line with historical averages. In contrast, European and U.S. high-yield spreads are 200 to 300 basis points tighter than their historical average.

And he adds that Asia bond high-yield default rates “are very low these days, around 3%.” That’s the result of a thriving regional economy. As the International Monetary Fund noted in its most recent global survey, “the outlook for the Asia-Pacific region remains robust—the strongest in the world, in fact—and recent data point to a pickup in momentum.”

The Matthews Asia Credit Opportunities Fund carries a solid 4.37% one-year trailing yield. Another option is the VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM), which carries a 0.40% expense ratio and a very appealing 6.49% trailing yield, good enough for a four-star rating from Morningstar.

The Other Half Of The Stock/Bond Axis
Of course, equities also provide a range of income opportunities as well, with dividend yields often exceeding bond yields. But such stocks aren’t immune to rising interest rates either. Fisher’s Anderson notes that REITs, telecoms, master limited partnerships and utilities may feel the impact of rising rates. In his search for dividend yields, he is focusing his time these days on European stocks. “They have been unloved, compared to U.S. equities, which is reflected in their valuations,” says Anderson. “There’s still a fair bit of caution about the region, but the economic measures out of Europe are quite good these days.”

Anderson singles out European banks for mention. “Their yields are appealing, and we’re seeing rising lending rates in Europe, whereas lending rates in the U.S. are flattening.”

The bullish European view is shared by Thornburg’s McMahon, who notes that the average European dividend yield (outside the U.K.) stands at 3.7%, well above the 2.0% average yield seen in the U.S. The Thornburg Investment Income Builder fund (TIBIX) carries a 3.97% trailing-12-month yield and has 55% of its assets invested in financial services, communication services and energy.

He singles out JP Morgan Chase, the fund’s second-largest holding, as a firm that meets the fund’s mandate of stable and growing income streams. “Their dividend could just about double considering the excess capital they’ve built up,” he says.

Few income investment strategists sing the praises of the U.S. right now. “I don’t see a case for stronger economic growth in the U.S.,” says Bryce Fegley, portfolio manager of the Sextant Global High Income fund (SGHIX). And he adds that U.S. equities are notably more expensive than their global peers.

Fegley and his management team can shift assets between stocks and bonds as they see fit to capture the best returns for capital preservation. The fund currently has a roughly 50% weighting in bonds and around 30% in foreign stocks, according to Morningstar.

A Place For MLPs?
As noted earlier, some income-producing equities may struggle to retain their value if fixed-income yields begin to siphon away interest. Savita Subramanian, Merrill Lynch’s head of U.S. equity and quantitative strategy, is not a fan of utilities or REITs in this environment. “Sell stocks that look like bonds and buy stocks that look like stocks,” she said in an August 1 conference call. Telecoms that carry decent yields are also flagged by Subramanian, as she suggests avoiding firms with high levels of debt (which would see a spike in the interest expense on it).

Energy MLPs, while carrying similar interest rate risk, at least offer comparatively robust yields. And they are surely worth consideration if you believe that oil prices will remain stable and you are not expecting much interest rate movement.

These partnerships span the spectrum from stable low-yielders to more volatile high-yielders. Rather than focus on the right firm, the JPMorgan Alerian MLP Index ETN (AMJ) brings a basket approach, tracking the payouts of more than three dozen such firms.

To be sure, erratic energy prices and volumes can lead to variable dividend distributions. The 2017 payouts for this exchange-traded note, for example, are on track to be around 10% lower than the 2016 $2.08 per unit distribution. Still, the current pace of payouts reflects a roughly 6.5% annualized yield.