Attractive starting point for yields heralds fixed-income opportunities

With yields on the rise, now is a good time for investors to increase their allocations to fixed income, says Brian Giuliano, senior vice-president, client portfolio manager with Brandywine Global Investment Management.

Giuliano said the zero-interest era left many investors a little gun-shy, but conditions have improved dramatically over the past few years.

“The world has changed. We’ve come a very long way from low-yielding or even negative-yielding bonds,” he said. “This is a really good time to reassess your asset allocation, to think about increasing fixed income exposure.”

He said yields have normalized to levels that historically have generated attractive long-term returns.

“So take advantage of that income,” he suggested. “But credit spreads are tight. So don’t go too far down in quality; don’t reach for too much yield until a better margin of safety appears.”

Giuliano advocates a multi-sector strategy to take advantage of fixed income opportunities without taking on too much risk.

“The benefit of a multi-sector strategy is the ability to tap into multiple return sources,” he said. “Ultimately, the goal is to earn an attractive return from diversified return streams — some combination of high-yield credits, investment-grade bonds, mortgage-backed securities and emerging markets.”

He said a multi-sectoral approach can capture unexpected returns stemming from market developments that favour one sector over another.

He said fund managers tend to overlook high-quality government bonds — eschewing their relatively low returns in favour of more exciting prospects. But these safe-harbour assets can play a vital diversification role, he said.

“When economic turbulence occurs, when fear increases, investors bid up assets like Treasuries [and] Canadian government bonds,” he said. “So being able to incorporate those low to negatively correlated assets episodically within a multi-sector allocation can help protect principal in down credit markets and help achieve, ultimately, more consistent outcomes.”

Giuliano said if the torrid pace of appreciation within the equity market slows, fixed income can deliver attractive returns, thanks to the starting place for yield today.

“Headline economic activity is strong, but there are cracks beneath the surface of the global economy that do have our attention,” he said. “We think that both growth and inflation are likely to be biased lower in the coming quarters. Ultimately, that allows central banks to be able to ease their very restrictive policies [and] lower interest rates, at least to some degree. And historically, bonds have performed well in that environment.”

He said some segments of emerging market debt look attractive.

“In particular, we like the commodity producing emerging markets in Latin America,” he said. They have very attractive yields on both a nominal and inflation-adjusted basis.”

He also likes high-yield and investment-grade credit, where yields are attractive. But with tight credit spreads it is important to balance income and safety. Active management is key.

“Being able to play offence and defence at different times, or take advantage of opportunities [and] minimize risk, is so important,” he said. “And right now we want to balance income with safety in our multi-sector strategy.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.