With recent headlines—highlighting inverted yields curves and negative-yielding bonds—weighing on investors, why would anyone hold bonds in this environment? It’s a logical question.

Admittedly, seen in isolation, bonds don’t appear overly attractive. However, we stand by our long-standing view that:

1. Bonds are fundamental to managing risk in a balanced portfolio through all stages of market and economic cycles.

Despite the fact that global bond yields are hovering around all-time lows, they can move lower and if they do, the price of bonds we hold will appreciate. Although our investment view does not call for a near-term global recession, risks abound in the financial markets. US/China trade talks, the eurozone’s slowing economy and ongoing uncertainty around Brexit, just to name a few. It’s also understandable that investors focus on the upward climb of equity returns. However, we know that what goes up can, and will eventually, go down. If global equity markets experience unforeseen turmoil, we expect a portfolio’s bond component to act as a critical buffer, minimizing downward pressure on portfolio returns. Additionally, consistent and predictable interest payments can reduce overall portfolio volatility and provide ongoing liquidity.

2. Not all bonds are created equal and select issues deserve a closer look.

In this long, low interest rate environment, the temptation to reach for higher yields has never been greater. But, with few exceptions, in the world of bonds, higher yields coincide with more risk. Plus, higher yielding bonds have a greater tendency to move in the same direction as equities, which means the buffer advantage diminishes during volatile times. We’re interested in bonds that provide predictable cash flows and diversification benefits. In other words, we want bonds that behave like bonds. Today, we favour investment grade corporate bonds (corporate bonds deemed to have relatively low probability of defaulting) and provincial government issued bonds. In our opinion, the current spread of these bonds (the difference in yield above Federal government issued bonds) offers fair compensation for any incremental risks.

3. Active management and a global opportunity set can improve returns.

There’s a longtime perception that bonds are to be bought and forgotten. We believe the opposite. In our view, actively managing fixed income assets is important. We know from experience that tactically adjusting our portfolio’s exposure to credit qualities, duration (interest rate sensitivity) and maturities can add value, regardless of the absolute level and direction of interest rates.

Global bonds in balanced portfolios can also improve risk-adjusted returns. Through our relationship with Franklin Templeton Investments, we’re able to leverage fixed income investment expertise and experience worldwide. To gain exposure to global bonds, we currently use the Templeton Global Bond Fund. In our view, including this fund adds strategic benefits such as low correlations (with Canadian bonds and global equities) and a much broader opportunity set. It also adds tactical advantages such as higher yields and shorter duration.

The Right Place for Bonds

While the current environment for bonds may prove frustrating for income-seeking investors, we believe this asset “earns its keep” in a variety of ways—starting with helping folks sleep better at night. We think that’s a pretty worthwhile attribute. While bonds might not be as engaging to discuss as equities, we believe it’s critical that any questions you may have are answered. Take a minute to get in touch.