Against this changed market landscape, we believe there are three things
fixed-income investors should focus on to help navigate a rising rate
environment.
1. Diversify away from domestic exposure
Moreover, Canadian bonds represent just 3% of the global fixed income
market.* Investors who stay local are in effect leaving 97% of the alpha
opportunity, such as global credit (including investment grade, high yield,
loans, and emerging markets) and non-domestic inflation protection, on the
table. In this challenging bond environment, it’s more important than ever
for investors to seek diversification and source global opportunities.
Many Canadian investors tend to prefer domestic bonds, which offer limited
breadth and diversification. Exposures in Canadian fixed income are
concentrated in investment grade bonds, primarily from federal and
provincial governments and corporations within financial, energy and
infrastructure industries.
2. Be active to adapt to the changing market landscape
For many bond investors, the knee-jerk reaction to rising rates is to
simply reduce duration. Instead, we believe it’s worth looking at the
balance between interest rate and credit risks across their entire
fixed-income allocation. By actively adjusting exposures and taking
advantage of the global opportunity set, a nimble investor can add high
yield or emerging markets exposures for potential income to help offset
rising domestic interest rates.
3. Remember what your fixed income investment is for
Too often investors are tempted to act if their investments are falling in
price, as might be the case for bonds when rates start to rise. However,
investors should not forget the purpose of their bond allocation: whether
it’s to meet income needs or as a diversifier against equity risk (or
both), a diversified bond investment plays a crucial role in a
well-balanced portfolio.
*Bloomberg, as of 8/31/2018
Aubrey Basdeo, Managing Director, Head of Canadian Fixed Income, BlackRock, is a member of
the Product Strategy Team within BlackRock’s Model-Based Fixed Income
Portfolio Management Group. He leads the product strategy effort in
Canada for both the Institutional and iShares businesses.
Rachel Siu
is a Director and is a member of the Product Strategy team within
BlackRock’s Global Fixed Income group. Rachel is a regular contributor
to
the blog
in Canada.
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BlackRock Canada website. Used with permission
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