Fixed income golden age: Go global or go home?

26 March 2024 by National Bank Investments

There is often a “home bias” in bond allocations compared to equity. In the current rate environment, the golden age of fixed income represents an opportunity to expand your fixed income horizon beyond Canada.

There is a whole other world out there

Canada’s bond market global performance ranking (Figure 1) has been volatile over time. Although Canadian bonds didn’t perform as well as other countries in 2023, it represents a sliver of the fixed income opportunities at just 3.5% of the global investment-grade bond market (Figure 2). A purely domestic approach has historically left a wealth of opportunity off the table, in both developed and emerging economies.

Graph showing bond market performance by country

Allocating to the U.S. is a good first step

Looking to Canada’s southern neighbour is an obvious choice when looking to diversify. The U.S. aggregate bond markets are US$25 trillion in size, accounting for 40 percent of global aggregate investment grade bond markets, or 12 times the size of Canada’s market (January 2024). The U.S. market is by far the broadest and most liquid market in existence.

Map showing size of the global bond market by regions

A global approach, latitude for active investors

Global fixed income markets can trade inefficiently relative to each other. Credit spreads in two markets can diverge for no fundamental reason. The same inefficiency can occur within a corporate sector. These represent opportunities for active investors to overweight one region and underweight the other (Figure 3). Active management with a global reach can allow you to overweight one bond and underweight the other for potential profit and no change in underlying credit risk.

Graph showing opportunities created by pricing inefficiencies in global markets

Leverage the golden age of fixed income

Having managers with investment teams on the ground in the U.S. and beyond could allow investors to leverage what many are calling the golden age of fixed income. Management teams should have all the resources needed, but also be nimble enough to move quickly in an ever-changing market. As with equity, the question may be whether to invest at home or abroad, the answer is diversification is always key.

Legal notes

Source: Bloomberg, Insight, January 2024
This article is based on Insight Investment research and was featured in Benefits and Pensions Monitor

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