Why investors need to think more carefully about fixed income

D’Costa remembers a time before the global financial crisis when you could get 5% just by holding a five-year government bond. Today, however, we are in a time when advisors need to “take a step back and really ask clients what they want from fixed income.”

Mainly, he added, people want three attributes: security (preservation of cash flow), diversification from stocks, and income. Satisfying all three via a single bond is no longer an option, so investors need to think carefully about what really matters to them and their weighting. Why? Because these three attributes are now accompanied by a negative.

Whether you have your money in a market product or a GIC, there is always an element of convenience; you are not going to lose money. However, after taxes and inflation, you are likely to lose purchasing power.

If you want to diversify from stocks, you can get some, but you have to take risks by holding longer-term sovereign debt like 10- or 30-year bonds. D’Costa explained, “If interest rates go down, you will get a positive result even from these current returns. If interest rates were to drop 50 basis points right now, 10-year bonds would likely generate a 4-5% yield.

“It’s fantastic, but at the same time, if interest rates go up, you take a bigger loss. You can still get coverage, it’s just not that clear and there is a negative that comes with it. “

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