While fixed income failed to pay high enough yields, or when its volatility spiked, Chim says many investors took shelter in high interest savings exchange-traded funds (ETFs) and other cash equivalents. While those investors may get some of the yield component, they are currently missing out on the possibility of capital appreciation when yields fall slightly. The balance has shifted toward fixed income, in Chim’s view, that a 60/40 allocation or even a slight overweight to fixed income makes sense to him.
Chim also specializes in corporate bonds within the wider area of fixed income. Corporate bonds, he accepts, have done somewhat better for investors in the past, as they tend to have more positive exposure to strong economic times and offered higher yields than government bonds. Chim still believes that corporate bonds can perform in this new era for fixed income.
“This economic backdrop kind of gives you a nice sort of happy medium spot where you can generate some good returns while still benefiting from the economy being stronger than we expected and higher rates overall,” Chim says. “You don’t need then to have the thesis that rates are going to fall to make good returns from credit.”
On a structural level, Chim sees fixed income working in the longer term because we appear to be headed into a period of structurally higher inflation. Demographics, debt levels, decarbonization, and deglobalization look set to put more upward pressure on prices for the foreseeable future. If inflation stays closer to 3 per cent long-term, we should expect central banks to keep rates relatively high, preserving that yield component of fixed income assets. That doesn’t mean we won’t see rate cuts in the near term, though. Broad consensus is that the Bank of Canada will cut rates in the spring or summer this year which should spur both greater stability and opportunity for upside in fixed income assets.
At the event, Chim and his fellow speakers plan to delve deeper into the outlook for fixed income, how its dynamics are changing, and how key decisions like duration and subsector can help advisors show their value to clients.
