Insights | Nov 4, 2021

Optimizing Fixed Income Strategies in a Low Interest Rate Environment

The decline in interest rates globally over the past 30 years has pushed institutional investors to recalibrate their fixed income portfolios to improve the return profile. A popular approach is the combination of core fixed income with an allocation to core plus components (Core Plus strategies). Core Plus strategies with an expanded opportunity set that may include global public and private debt, as well as investment and non-investment grade securities, has the potential to meaningfully improve fixed income investor’s overall yield profile while taking appropriate additional risk.

The broadened opportunity set may include the use of private debt, real assets, high-yield bonds, derivatives instruments, emerging market bonds or other foreign bonds as key components of a Core Plus strategy, with a focus on risk diversification and income generation. While the use of traditional core fixed income strategies remains important in a total portfolio strategic allocation, the combination with core plus strategies represents a leading-edge investment solution in this low interest rate environment, if done the right way.

Evolution of Canadian Fixed Income: Structure and Composition

For more than 30 years, interest rates have been trending downward. As a result of the extraordinary support from global central banks through quantitative easing programs, there has been a clear trend of an increasing amount of negative yielding debt globally, which reached a record US$18 Trillion at the end of 2020 (Chart 1). In the mid-1990s, the yield of the FTSE Canada Universe Bond Index was as high as 8.5% before descending to all-time lows during the COVID-19 pandemic. The yield is now at 1.8%, as of September 30, 2021, creating challenges for investors to meet total return objectives.

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