Investors will need to shift their mindset on how they view their fixed income holdings.
From their early 80’s peak, rates have continued to fall, in line with inflation and have afforded bond holders the luxury of high coupon payments and strong price appreciation.
But now, “Interest rates are going to rise, bonds are going to get trashed!”
Let’s see how many times that was said over the past 20 years...
Is there any reason to think this time, finally, the consensus on rising rates will be correct?
But what investors shouldn’t do, is ditch bonds completely, especially those in, or nearing retirement. Returns for balanced portfolios (40%+ fixed income), have been somewhat more volatile and modestly negative (-1%) this year, but, are still nowhere near the prospective volatility of equity investments, which can decline by 5% in literally a few hours of trading.
So with that in mind, investors who hold balanced portfolios that include bonds, will need to prepare for their fixed income returns to be less predictable than what they’re accustomed to. Or, consider holding GIC’s, floating rate bonds, or bonds priced below par value to reduce the risk of a capital loss and support the value of your portfolio.
5-year Canadian GIC’s are are yielding greater than 3% and the yield-to-maturity on 5-10 year corporate bonds is in the mid-4% range. Investing in these types of securities as opposed to bond ETF’s is a fine solution, IF (and yes, thats an IF) do continue to rise.