Income Opportunities: Bonds

Greater bond diversification, a good strategy for generating yield

The need for stable domestic core fixed income has not necessarily diminished. However, to combat constrained yields combining strong core fixed income with diversified sources of yield can help portfolios provide a more comfortable risk/return profile while still participating in a rising market.

Generating Yield Continues to Be a Challenge

line chart - Developed Markets 10-Year Govt Bond Yields
Source: Bloomberg from November 30, 2005 to November 30, 2018. Developed countries selected based on their relative economic size in relation to other developed nations. For illustration and educational purposes only. Not to be construed as investment advice. All indices referenced above are unmanaged and unavailable for direct investing.

The Historical Impact of Greater Fixed Income Diversification

The addition of a variety of fixed income to a core fixed income portfolio has the potential to increase risk-adjusted returns.

stacked bar chart - 5-Year Return
Source: Morningstar Research Inc. as at November 30, 2018, based on the 5-year annualized rate of return. Domestic Fixed Income represented by FTSE TMX Canada Universe Bond Index, High Yield by Bloomberg Barclays Capital Global High Yield TR Index (USD), Convertible Bonds by ICE BofAML Global 300 Convertible Bond TR Index ($USD) and Emerging Market Debt by Bloomberg Barclays Capital EM Aggregate TR Index (USD). For illustration and educational purposes only. Not to be construed as investment advice. All indices referenced above are unmanaged and unavailable for direct investment.
table - jellybean chart

Taking an Active Approach to Fixed Income

Focusing on domestic bonds can be a good strategy for certain investors. However, in order to increase yield potential and combat a changing rate environment, an active, diversified approach to fixed income is increasingly necessary to mitigate risk and increase risk-adjusted returns.

Source: Morningstar Research Inc. as at November 30, 2018, based on the 5-year annualized rate of return. Real Return by FTSE Canada Real Return Bond, Global HY Bonds by Bloomberg Barclays Capital Global High Yield TR C$, CAD Corp. Bonds by FTSE Canada All Corp Bond, EM Bonds by Bloomberg Barclays Capital EM USD Aggregate TR USD, CAD Gov't Bonds by FTSE Canada All Government Bond, U.S. Bonds by Bloomberg Barclays Capital US Agg Bond TR USD, DM Bonds by S&P Global Developed Sovereign Bd TR USD, Convertible Bonds by ICE BofAML Global 300 Convertible Bond TR USD, FR Loans by S&P/LSTA Leveraged Loan TR. For illustration and educational purposes only. Not to be construed as investment advice. All indices referenced above are unmanaged and unavailable for direct investment.
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