Bonds beyond interest rates

09 March 2023 by National Bank Investments
Sky with chinese lanterns

In the past year, rapidly rising interest rates have been a challenge for bond market investors. Despite this challenge, there are still opportunities in the current context.

Primary objective of fixed income within multi-asset portfolios

Bonds: provide a fixed income stream that can be more predictable than stocks. During periods of market volatility, the income generated from bonds can help provide a portfolio with stability.

Diversification: Bonds have different risk and return profiles than stocks. Investing in bonds adds diversification for your portfolio and can help reduce overall portfolio risk.

Challenges of fixed income investing

The ability of bonds to offer either of these traits has steadily diminished over the past decade. A long bull market flattened yields to record low levels, forcing investors to make a choice: 

  • Accept smaller returns by investing in government bonds at ever lower yields, or 
  • Chase higher yields in lower quality bonds and take on more risk as a result.

Recently, there have been significant changes in the fixed income landscape. In 2020, an incredible 90% of the government bond market was offering a yield below 1%, and more importantly, 40% was trading at a negative yield (see image). Not encouraging news for investors chasing yields. However, the year 2022 saw the supply of negatively yielding debt practically vanish where now less than one fifth are yielding less than 1%.

Global government bond yields

Global government bond yields graph

Source: Bloomberg, BofA/Merrill Lynch, J.P. Morgan Asset Management. Index shown is the BofA/Merrill Lynch Global Government Bond index. Guide to the Markets - Europe. Data as of 31 January 2023.

Things are looking up

While interest rates have risen, bond yields have also increased. Meaning investors can earn a higher yield on their bond investments. This increases their attractiveness within a balanced portfolio.

Global government bond real yields look more attractive than they have in 15 years

Global government bond real yields graph

Source: Bloomberg, Barclays Live, J.P. Morgan, ICE BofA. As of 31 December 2022.

To further enhance yield, improve diversification, and manage interest rate sensitivity, a pragmatic approach would be to diversify the fixed income portion of a multi-asset portfolio, much in the same way lighting multiple lanterns instead of just one floating up to brighten the night sky. 

Reap the benefits of an unconventional approach

The NBI Unconstrained Fixed Income Fund

NBI Unconstrained Fixed Income ETF (NUBF)

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 also have access to a broader investment universe and have more flexibility in adjusting to changing markets.

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.

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.NBI Funds (the “Funds”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated.NBI exchange-traded funds (the "NBI ETFs") are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Management fees, brokerage fees and expenses all may be associated with investments in NBI ETFs. Please read the prospectus or ETF Facts document(s) before investing. NBI ETFs are not guaranteed, their values change frequently and past performance may not be repeated. NBI ETFs units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns. NBI ETFs do not seek to return any predetermined amount at maturity.
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