Strategies for fixed income investors as rates rise

In the current rising rate environment, fixed-income investors can find protection in short-term bonds and floating-rate debt, says Ebad Saif, fixed income client portfolio manager with CIBC Asset Management.

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Bonds that have less than a five-year duration experience lower drawdowns when interest rates rise, Saif said. Because the yield curve is relatively flat, investors can get a similar yield on a three-year bond and a 10-year bond.

“There isn’t the usual term premium where investors are compensated more for taking on more interest rate risk,” he said. 

He recommends bonds in the two- to six-year range.

The new issue market is also presenting opportunities for investors because new, high-quality bonds are being offered at a discount, he said.

Investors can also take advantage of floating-rate debt, Saif said, as these securities reset periodically and avoid the negative impact of rising rates. Floating-rate debt strategies include investment-grade bonds as well as high-yield bonds and floating rate loans.

High-quality floating rate corporate bond strategies are currently yielding about 4.5%, Saif said, which is “quite attractive.” High-yield bonds and floating-rate loans offer a significantly higher yield, around 9.5%, but the latter comes with additional credit risk. 

“For investors willing to look through short-term noise, locking in close to 9.5% yields for a below investment grade loan strategy is a great investment opportunity,” Saif said.

The elevated yield also provides a buffer in case credit spreads widen in times of market stress, so it’s a good time for investors with a long-term horizon to capitalize on this type of strategy, he said.

Lastly, while investors have been focused on protection from rising rates, Saif said that could change as central banks near the end of their rate-hiking cycle. Investors will have the opportunity to “put cash to work” and lock in elevated yields that he said could be short-lived. 

“The market’s already pricing in rate cuts in the second half of 2023,” Saif said, “so investors should start thinking about putting capital to work before their current opportunity is unavailable.”

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.