As published in Wealth Professional on 21 March 2024.
In a new paradigm, it’s time for advisors to learn new lessons about this key asset class.
We had 14 years of ZIRP. Zero interest rate policies by key central banks in developed economies were the norm between the Great Financial Crisis and 2022. In that time, the utility of fixed income as an actual source of income faded. Bonds offered stability and capital protection, a source of returns uncorrelated to equities. New strategies and asset classes rolled out to deliver higher yields. While fixed income remained a core holding for many, its uses were different. Then 2022 happened.
Following the onset of historic inflation central banks embarked on one of the steepest and fastest rate hiking cycles ever. Bond markets were hit with unprecedented levels of volatility. That capital preservation side of the fixed income bucket failed to function as these assets fell in near lock-step with equities. Only at the end of 2023 did it truly seem like that cycle was at an end. Now we sit at what most agree are peak interest rates looking at a very different landscape for fixed income.
On March 26th Wealth Professional will host an Advisor Connect webinar addressing this new era for fixed income. Ahead of the event, two speakers offered some of their insights into the state of fixed income today and why advisors should be taking the time to learn more about these assets now.
Darcy Briggs believes that inflation should be one of the core reasons advisors take another look at fixed income now. Briggs is a Senior Vice President & Portfolio Manager at Franklin Templeton Fixed Income and a panellist at the event. He explains that many of the forces that kept inflation low in the 14 years of ZIRP have unwound. Geopolitical conflict, a shift away from globalization, and the green transition have all introduced inflationary forces into the global economy. The resting levels of inflation going forward have yet to be determined, but there is consensus that yields will not return to their ZIRP levels.
“We don’t think we’re going back to the zero bound, and that makes fixed income compelling. You actually are starting to get income as part of the return for fixed income,” Briggs says. “People forgot what fixed income actually means. It means income, and now you can keep up.”
The trouble is that in this moment, there is still uncertainty and volatility within the fixed income space. Briggs argues, therefore, for active management in fixed income assets to better navigate what remains a changing landscape.
Since interest rate hikes began in 2022, Geoff Castle has seen advisors shift their allocations towards short-term money market products and GICs. Castle is another panellist at the event and the Lead Portfolio Manager of Pender’s Fixed Income portfolios at PenderFund Capital Management. He explains that in an environment where fixed income was not protecting capital and rates were rising, these products offered an attractive avenue of return.
“Now many advisors are still in that heavy GIC allocation and they’re questioning if they should pick up fixed income,” Castle says. “The question is whether they should pick up a term product or a spread product.”
Castle says there are opportunities in both spread and term today that didn’t exist previously. In credit, for example, high yield index spreads are relatively low compared to historical levels. However, outside of major indexes Castle sees a range of individual credit products with much higher spreads without the risk that comes from assets at the bottom of the capital structure.
The opportunities in term rest more heavily on an outlook for interest rate cuts. Castle believes we have been in a disinflationary trend for over a year now with the Canadian economy slowing and global supply chains coming a bit unstuck. That environment should be positive for those term products as we head towards an interest rate cut.
As advisors look to find opportunities in fixed income assets and understand the history and contemporary macro forces that brought us to this point, both Briggs and Castle stressed the importance of events like the upcoming advisor connect.
“Advisors have an opportunity to triangulate across a few different sets of informed opinions,” Castle says of the event. “It’s a good opportunity to give their own position and rethink what their options are in fixed income.”
The advisor connect on fixed income will be held on Tuesday March 26th at 1:30pm EST. Register here now.
