Right after last year’s U.S. elections, interest rates moved steadily higher as investors positioned themselves for a quickening pace of economic growth. Yet as 2017 unfolded, a stream of economic reports made it clear that the economy wasn’t quite set to break out on the upside. In tandem, inflation gauges suggested a complete lack of pricing pressures. In response, interest rates steadily moved back to pre-election levels.

So where does that leave fixed-income investors? Does it send them back to the playbook that has been in place for much of the past decade? Not necessarily. Central bank policies are starting to shift directions, and various kinds of fixed-income investments will respond in unique ways.

Before looking at various options, it pays to again take the pulse of central bank policy.

Hands Tied

This is an unusual time to sit on the Federal Open Market Committee (FOMC). The rate-setting committee had hoped to slowly remove accommodative policies, given that the worst of the global financial crisis was clearly in the rearview mirror.

Trouble is, the absence of apparent inflation suggests little need for monetary tightening. Jeff Rosenberg, the chief fixed-income strategist at BlackRock, believes the Fed will raise interest rates by a quarter point in December—and perhaps on more occasions in 2018. “But the impact of rising rates will be very gradual,” he says.

Indeed, the word “gradual” is being tossed around by many bond strategists these days. Mark Kiesel, the chief investment officer of global credit at PIMCO, thinks 10-year Treasurys will yield between 2.00% and 2.75% at the end of next year. Even the upper end of that range is well below the long-term average. Brian Nick, the chief investment strategist at TIAA Investments, says that “there will be a cap on U.S. rates as long as the [European Central Bank] continues to stimulate [through ongoing bond buying]. So rates will remain artificially low.”

Hidden Inflation Pressures?

As noted, the inflation outlook remains muted as far as most strategists are concerned. For example, the personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, has remained firmly below 2.0% in recent months.

But Ron Temple, co-head of multi-asset investing at Lazard Asset Management, thinks many investors are becoming too complacent about the potential for higher inflation. “The U.S. economy has shifted into a higher gear, and middle-class spending is now powering the economy,” he says. “In response, inflation pressures are starting to build beneath the surface.”

Indeed, with unemployment rates at a 16-year low, it’s surprising that we have yet to see a more robust pace of wage gains. Still, Temple thinks that inflation could move toward the 3.0% mark in 2018 as employers begin to dole out stronger wage increases to retain and attract staff. Temple adds that “we could end up with a more protectionist trade policy that also could prove to be inflationary.” Moreover, the dollar has fallen sharply against a basket of currencies, which has begun to lead to rising import prices.

If Temple is right that inflation will soon trend higher, then investors should consider adding inflation protection strategies, such as Lazard’s real assets fund (RALIX), to their portfolios.

While inflation trends deserve your close attention, also keep an eye on the Federal Reserve this winter. Janet Yellen’s term as Fed chair expires at the end of 2017, and several members of the FOMC are also likely to step down in January. “The composition of the Fed is going to change pretty dramatically,” predicts BlackRock’s Rosenberg. “So it’s hard to form a view of longer-term Fed policy.” The BlackRock Core Bond Fund (BCBAX) is among his firm’s fixed-income offerings.

The changeover in the FOMC will take place at a time when the Fed is unwinding its massive $4.2 trillion portfolio of mortgage and Treasury bonds. “The Fed doesn’t yet fully understand the extent that the QE (quantitative easing) process actually impacted rates,” says TIAA Investments’ Nick. “It’s hard to know in advance what the impact of the unwinding will be.” At a conference in Paris this past summer, Jamie Dimon, CEO of JPMorgan Chase, said the balance sheet shift “could be a little more disruptive than people think.”

Moving Beyond Plain Vanilla

Few strategists interviewed for this story recommend 10-Year Treasurys or investment-grade corporate bonds, the kinds of bonds you would find in the Bloomberg Barclays U.S. Aggregate Bond Index. Thanks to the low yields they currently offer, such plain vanilla bonds have only modest potential for price gains. And the income from those low yields might be fully offset by a drop in bond prices as rates rise. In a recent note to clients, TIAA’s Nick noted that “from 1990 to 2005, [the Bloomberg Barclays aggregate index] returned close to 7.5% per year, on average. But the current yield of just 2.5% makes duplicating that strong performance unlikely.”

That doesn’t mean you should simply shun fixed-income investments in general. “It’s critical that you have the diversifying value of bonds in your portfolio,” says BlackRock’s Rosenberg. To get that portfolio ballast, it may be wiser to instead seek out other corners of the bond market for more enticing yields or lower interest rate risk—for example, high-yield (i.e., “junk”) bonds or floating-rate funds.

TIAA’s Nick has a preference for the floating-rate funds. “They often have higher credit quality yet offer the same yield as junk bonds.” He added in a recent client note, “When rates are rising, investors in floating-rate loans generally earn higher income and experience smaller price declines.” The Credit Suisse Floating Rate High Income Fund (CHIAX) is a popular choice in this category.

Floating-rate funds are part of what PIMCO’s Kiesel refers to as “safe spreads.” He says that “in the later stages of an economic expansion, you want to move up the capital structure. And bank loans are senior debt, compared to general bonds [such as high yield] that are lower in the capital structure.” Subordinated debt, which most general bonds are, carry higher default risk if the economy were to slow down. Kiesel thinks junk bonds “just aren’t appealing later in the economic cycle.”

Ample Reasons to Wade Into Emerging Markets Bonds

These days, strategists suggest that emerging market (EM) bonds offer a unique blend of current yield and price appreciation potential. That’s because of divergent central bank policies. “Real [i.e., inflation-adjusted] interest rate differentials with these bonds look elevated relative to developed market bonds,” says PIMCO’s Kiesel. His firm offers dozens of fixed-income funds, including the PIMCO Income Fund (PONPX).

He thinks the Federal Reserve, the European Central Bank and the Bank of Japan have completed their interest rate easing cycles now that they have largely closed their economic output gaps. In contrast, still-high levels of unemployment in places like Brazil, paired with falling rates of inflation, means that “many EM central banks will lower rates from here.” And if interest rates in places like Brazil, Argentina and Mexico fall, as Kiesel predicts, then those nations’ bonds will rise in value.

Should investors hedge their currency exposure with EM bonds? Surely, if they believe that the dollar will strengthen from current levels against other currencies. But “even after rallying recently, many EM currencies are still favorably valued, compared to a few years ago,” says TIAA’s Nick. His firm offers the TIAA-CREF Emerging Markets Debt Fund (TEDHX), as well as the five-star rated TIAA-CREF Bond Plus Fund (TCBHX).

“There are ample reasons to like EM local-currency bonds,” adds Nick. “Many EM nations are seeing their growth prospects improve and [default] rates have been steadily dropping,” which leads his firm to an overweighting in EM bonds these days.

Lisa Hornby, a fixed-income portfolio manager at Schroders, also likes selective EM bonds and downplays currency risk. “We’re not looking at dollar strength for the foreseeable future.” Right now, she is also a fan of selective CLOs (collateralized loan obligations) for their high ratings and floating nature. She also recommends short-term asset-backed securities, which are most closely associated with mortgage bonds. With $11 billion in assets, the iShares MBS Bonds ETF (MBB) is a very liquid choice.

Indeed, the housing sector is a clear pocket of opportunity for fixed-income investors, suggests PIMCO’s Kiesel. “We’re still very constructive on the housing market. And non-agency mortgage bonds are among the few bonds that have price upside,” he says.

Kiesel notes that 94% of all mortgage bonds lack an investment-grade rating. “But they’re mis-rated because rating agencies were burned in the past [and] are now arguably overly conservative in their ratings.” As a result, the yields on such bonds are more robust than the current low mortgage default rates would seem to justify.

Are Munis at Risk?

Right after the 2016 election, municipal bonds (“munis”) fell out of favor on concerns that Congress would soon deliver tax cuts that would reduce the advantages of tax-free bonds. As hopes for tax cuts faded, muni bond prices rallied back.

But major changes may still yet come to the tax code, highlighting the ongoing risk to munis. Schroders’ Hornby thinks it’s important to be selective. “For clients with tax-sensitive portfolios, there are still some idiosyncratic opportunities with Illinois and New Jersey bonds,” she says. Her firm offers the Hartford Schroders Tax-Aware Bond Fund (STWTX). The fund managers at the Nuveen High Yield Municipal Bond Fund (NHMAX) have also favored bonds issued by Illinois and the city of Chicago.

Inflation is a clear wild card for fixed-income investments. Whether price pressures in the economy will start to build is an open question. Gleaning exposure from the range of fixed investment strategies noted above could help offset risk while providing solid income streams.