Optimizing Fixed Income Strategies in a Low Interest Rate Environment

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.

[…]