In fact, credit risk can offset a negative discount effect from higher nominal bond yields. In an inflationary environment, rising yields are often a reaction to a strengthening economy and, therefore, related to a decrease in default-rate expectations — the “association effect,” which is generally positive for credit-heavy fixed income assets, with overall returns resulting from the offsetting discount and association effects. This relationship highlights the importance of considering the source of nominal yield increases (inflation expectations versus real yields) when allocating fixed income capital.