Finding opportunity in fixed income

Fixed income assets are set to reclaim their status as essential portfolio components, said CIBC Asset Management’s Aaron Young.

According to Young, vice-president, global fixed income at CIBC Asset Management, bonds can once again be used as effective hedges against risks in other asset classes.

Listen to the full podcast on Advisor To Go, powered by CIBC.

“We actually think fixed income can step back into the role of being a ballast in an investor’s portfolio,” Young said. 

He noted the contrast with the near-zero interest rate environment of the recent past, where bonds weren’t effective buffers. However, with yields experiencing a resurgence, fixed income now offers a stronger defense against market turbulence.

“You earn income while you wait,” he said.

Young said the beauty of the fixed income market right now lies particularly within lower risk, low-volatility assets. He said short-term yields have risen from pandemic lows, allowing investors to access government and corporate bonds yielding above 4% with minimal duration risk. This, he said, could allow portfolios to yield upwards of 4.5% “quite easily.”

While Young sees opportunity within the corporate bond space, he stresses the importance of active management to take advantage of market inefficiencies and generate income. Conversely, he remains cautious about overly risky investments, advocating for a balanced approach that prioritizes risk-adjusted returns.

In terms of duration risk, Young said investors should avoid taking what he calls “a pure-play, long-duration position” and urges diversification across the yield curve, warning against assumptions based on interest rate movements.

For example, Young said the Canadian 30-year bond is one of the most expensive among developed markets.

“You would expect that bond price to come higher as rates fall down. But given the amount of demand in the long end, those rates have not moved the way anyone would expect or the way logic would predict,” he said.

“So again, we caution against trying to make a singular positioning play on super long bonds.”  

Young said the high-yield market is “priced to perfection” and less attractive. He thinks there will be better re-entry points in the near term as spreads move wider and valuations become more attractive.

However, for investors looking to de-risk some of their equity exposure, he said high-yield bonds can act as a hybrid asset class between the low risk of core fixed income and the higher risk of equities.

While some sectors within high yield may appear overvalued, he said opportunities exist in others, particularly among former investment-grade issuers offering quality at attractive yields.

“If you can be very selective there, there are pockets of opportunity in the high-yield market and the high-quality space,” he said.

This article is part of the Advisor To Go program, powered by CIBC. It was written without input from the sponsor.