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