Is it Still Worthwhile to Invest in Fixed Income?

Traditionally, bonds are one of the safest ways to invest. But what happens when a global pandemic rocks its stability? Wealth Management Professional, Jacoline Loewen, sat down with Richard Pilosof of RPIA to get to the bottom of where the future of fixed-income investments are headed.

Global fixed income has long been considered “the meat and potatoes” of any steady-growth portfolio. Thanks to the pandemic, even our most stable of investments in the mix has been challenged, leaving investors wondering if there is still future growth potential in the bond market. Richard Pilosof, founder and CEO of RPIA, says yes: Wealth management professional, Jacoline Loewen, deep dives into why. 

After spending over 25 years with RBC Capital markets and over 30 in fixed income, Richard has a heightened awareness of the 40 year evolution - or perhaps, devolution - of the bond market, “it's been a complete ride down in yields, and now we're unfortunately at zero.” Like Jacoline, many investors have relied on fixed income as an essential part of any portfolio for those seeking yield, serving as a “hedge in bumpy markets,” and now being affected by today’s rapidly changing interest rates. 

So how has history, and now COVID, affected the rate of return of the traditional bond market, and how should we approach our portfolios given these current challenges? 

“There’s been a distortion in what people perceive as the appropriate fixed income return and the risk-free rate of return that has had to be readjusted because of COVID.” Policy has changed, and so has the way we’ve had to think about return attribution with fixed income. The key element is to focus on the risk-free rate of return, and “the risk-free rate of return is now zero. So from that, what is the appropriate fixed income return profile? And clearly, it's lower.” 

If you are interested in wealth management and learning more about fixed income, please contact Jacoline Loewen.

In Richard’s view, while the fixed income return profile may be lower, it still plays an important role within the portfolio mix now and going forward. “So long as that distortion is well understood, and the perspective of the true return profile going forward remains as being lower” then you can approach investing in fixed income with an understanding of the real risks being presented knowing that “the long-term perspective of what the return profile looks like, will be lower.” 

If we remain in this pandemic-shifted environment for two or three years (a prediction that’s dually expected) with the lower for longer rates, “even though you have zero bounds in the short end, you still might have capital gains in tenure and in securities.” Having capital gains from other investments signal that perhaps an increased portfolio mix will shore up the lower rates from bonds, a discussion that Pilosof says is very much still in play. “Searching for active participants in asset allocation, continuing to look for ways to create income, or yield, or capital gains, in ways that are less traditional are going to be very, very important.” 

The fixed income market is certainly evolving, and by being aware of the distortion, the risks and the long-term opportunity, investors will have a more realistic base to build a COVID-proof portfolio from a position of strength. In having that realistic expectation of the return rate - that rate being zero - it allows for the understanding that for “every extra unit of risk you’re going to take in the marketplace, you’re going to take another level of risk.” Pilosof compares the corporate bond market “which is essentially liquid” to buying a loan, mortgage or direct lending product where the return profile will be much larger, also meaning “you’re going to take a different level of risk.” That risk being illiquidity. 

Assessing your client’s goals, presenting them with realistic expectations and an understanding of the distortion in the market will allow for a higher level of transparency, a line of communication that will be essential to a successful portfolio from a macro perspective. As we are likely headed towards another near-future crisis, opening the conversation to a more dynamic strategy over the long-haul will likely be the strongest route for investors. 

As for fixed income bonds as part of this strategy?

As Pilosof suggests, “the purity of fixed income is important and an important part of that portfolio.” The bond market may have shifted, but through the macro looking glass, it looks like it's here to stay.