In bonds we trust

22 June 2022 by National Bank Investments

Especially when the going gets tough

There’s no denying the first half of the year has been unsettling for fixed income. After five consecutive months in negative territory, many investors are on the fence about what lies ahead for this asset class.

The challenges of fixed income investing

Fixed income markets are on the cusp of a shifting dynamic:

Yields are low and bondholders are on the lookout for higher income;
Rapidly rising interest rates are having a negative impact on bond values;
Perisitent inflation is eroding the purchasing power of interest income.

Reshaping the narrative

Despite these headwinds, it is important to remember why fixed income is such an integral component of any diversified portfolio:

1. Bonds are an equity diversifier

Bonds tend to be uncorrelated with equities and this can help mitigate equity risk over the long term. As can be seen in the image, core bonds, treasuries and municipal bonds are all negatively correlated with U.S. equities while high yield bonds and emerging debt can also enhance diversification.

Diagram of the diversification benefits of fixed incomes.

2. Bonds provide a steady source of income

Coupon payments can help preserve capital in market downturns. For those that are looking for enhanced income opportunities, fixed income investments overseas or in non-core sectors can greatly enhance income potential in a low yield enviornment (see image).

Navigating the rising rate environment

While investors may be tempted to liquidate their fixed income holdings in a rising rate environment, they should rather focus on managing their exposures within the asset class.

For instance, high yield bonds, emerging market debt, preferred equity and bonds with shorter duration all tend to perform better in rising rate environments. In the current inflationary enviornment, absolute return and inflation based fixed income strategies can also act as a hedge.

All things considered, staying invested in fixed income is crucial to maintaining a well-diversified portfolio. Being open to non-traditional fixed income strategies can also help investors overcome some of the challenges!

Reap the benefits of an unconventional approach

NBI Unconstrained Fixed Income Fund

Non-traditional fixed income strategies have more leeway when it comes to enhancing yield, improving diversification and managing interest rate sensitivity.

Not only are they not bound by constraints or a benchmark, but they have access to a broader investment universe and have more flexibility in adjusting to changing markets.

NBI Unconstrained Fixed Income Strategy

Take advantage of attractive risk-adjusted return potential through a less restrictive approach.
Benefit from improved diversification, downside protection and return stabilization by investing in assets uncorrelated to a core bond approach.

NBI Insights will be put on hold for the summer. Stay tuned for the next publication at the end of August.

Legal notes

The information and opinions herein are provided for information purposes only and are subject to change without notice. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

The NBI Unconstrained Fixed Income Fund (the “Fund”) is offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. JP Morgan Asset Management acts as sub-advisor for the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus of the Fund before investing. The Fund’s securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Fund is not guaranteed, its value changes frequently and past performance may not be repeated.

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