The exciting opportunities in fixed income investing

Aaron Young: We’re definitely excited about the opportunities in fixed income. The different elements now embedded in the market make it a very attractive asset class. But that's not to say it won't be a volatile ride, especially given the backdrop of central banks trying to fine tune interest rates. Making sure they're not too hot, not too cold. They don't want to re-spark inflation, but they don't want to push the US and Canadian economies into a deep recession either. Volatility is definitely here to stay, but it should get narrower and narrower as we move forward. What I will say — and this is one of the things I love about the fixed income asset class these days — is that income has returned to the market.

If you rewind back to the COVID-19 days, it was hard to generate income when interest rates were near zero. Those days are gone. We can buy short-term treasuries and short-term Canadian government bonds that yield north of 5%. And that, for us, is just a baseline of what we can produce in returns, because we haven’t touched upon the topic of corporate bonds and the opportunity for active management yet. Extremely exciting.

Aaron Young: When you look at corporate bond opportunities — whether they’re investment grade or high yield — you have to focus on where that yield is coming from. Investors need to keep in mind that when you look at a typical corporate bond fund, its yield is going to look attractive. But a large part of that yield is just coming from the underlying interest rate.

The key to finding value in corporate bond strategies is to focus on spread. That's the difference between the yield you would get on, for example, a 5-year corporate bond and a 5-year government bond. Spreads right now are not overly high or low — really middle of the range. Against that backdrop, we don't want to take a lot of credit risk but can still earn a really attractive yield and total return for our corporate bond funds.

With our positioning, we’re very concentrated in the short term part of the corporate bond market. So we’re buying bonds that mature in 1 to 3 years at most. We don't need to buy longer-term bonds to produce an attractive yield. In fact, we're in an unusual situation where buying longer-term bonds actually provides less yield due to the inversion of the yield curve.

We’re getting exceptional yields with investment grade bonds from commonly known companies like TELUS and Enbridge. These are the kinds of names that make up the core positions in our corporate bond funds — high quality companies with low default risk. We try to avoid cyclical sectors that we think might see a little pain in a slowing Canadian economy. The backdrop of higher interest rates gives us the luxury of being very conservative on risk without sacrificing yield and total return. In the past, it was hard to get excited about fixed income investing when interest rates were lower. You can’t say that anymore because of the current elevated interest rate environment.

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