Myths and realities in fixed income investing

01 September 2019 by National Bank Investments

Just when investors were warming up to the notion of rising rates in 2019, fixed income markets may be on the cusp of yet another paradigm shift. Surprisingly enough, central bank policymakers have recently taken a dovish turn in their approach to policy normalization, contrary to investor expectations. The U.S. Federal Reserve even cut its benchmark rate for its first time since 2008, in July.

Needless to say, it came as a surprise when bonds performed better than expected year-to-date, while the financial community assumed the glory days of bonds were over. Investors often tend to turn the other cheek to this asset class, but is it really justified? We’re setting the record straight with our top three myths and realities that apply to fixed income.

MYTH #1: Equities always result in higher returns

REALITY #1: Fixed income assets tend to outperform riskier asset classes during periods of high volatility, erratic geopolitical events, economic downturn or low inflation.

Bond prices tend to move in different directions than stock prices, especially during market downturns.

Source: Morningstar Direct. Stocks are represented by the S&P/TSX Index and bonds by the FTSE Canada Bond Universe. Past performance is not an indication of future returns.

MYTH #2: Rising rates have a detrimental effect on fixed income assets

REALITY #2: Some fixed income assets still manage to generate positive returns in previous rising rate environments, such as high yield and emerging bonds, as well as preferred equities. Strategies to minimize risk sensitivity to interest rates also exist.

MYTH #3: Fixed income assets are only for conservative investors; rates are too low to keep this asset class in a portfolio

REALITY #3: Including fixed income assets in portfolios provides diversification for all investor profiles, aiming to offset risks.

Key roles of fixed income investments

THE VERDICT IS IN: Fixed income assets have a place in every portfolio

With the equity market performing well in the past few years and interest rates still relatively low, it can be easy to overlook fixed income investments.

Regardless of interest rate movements, bonds will always be an important component of any diversified portfolio. Investors, take note: there are traditional and non-traditional fixed income strategies that can provide greater levels of risk diversification and the chance to benefit from a broader range of fixed income returns.

Performance across the fixed income spectrum may differ based on their composition and market environment.

While traditional investing strategies are proving to be ineffective under certain circumstances, this reference table shows it is possible to identify the best opportunities and adapt portfolios to changing market conditions.

Legal notes

The information and the data supplied in the present document, including those supplied by third parties, are considered accurate at the time of their printing and were obtained from sources which we considered reliable. We reserve the right to modify them without advance notice. This information and data are supplied as informative content only. No representation or guarantee, explicit or implicit, is made as for the exactness, the quality and the complete character of this information and these data.

The opinions expressed are not to be construed as solicitation or offer to buy or sell shares mentioned herein and should not be considered as recommendations.