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