Fixed income revival: How Manulife Investment Management is aiming to seize high-yield opportunities in a volatile market

This article was produced in partnership with Manulife Investment Management

Fixed income has had a rough ride lately. For years, investors have been asking, Is it even worth it? Bond yields went from steady to volatile in what feels like the blink of an eye. The traditional safety blanket of fixed income? Frayed. Inflation? Skyrocketed. And then central banks decided to throw in rate hikes and cuts for dramatic effect.

But here’s the twist: the fixed-income landscape is no longer the same staid, low-return vehicle of the past few years. Today, it’s offering something investors may not have seen in a while—real opportunity. With yields recalibrated and inflation seemingly in check, fixed income is back on the radar, but not in the way most people might expect. It’s not just about clipping coupons anymore; it’s about capital preservation, liquidity, and seizing low-volatility, high-return plays that can outperform generic bonds.

Earlier this year, Manulife Investment Management launched two liquid alternative funds: the Manulife Alternative Opportunities Fund and the Manulife Strategic Income Plus Fund. These funds are designed to leverage new tools and strategies to provide investors with greater risk-adjusted returns.

Roshan Thiru, who leads the Manulife Canadian Fixed Income team, emphasizes that his team’s fixed income strategies are not about reinventing the wheel but rather building on the established practices they’ve honed over decades.

The team’s goal with the Manulife Alternative Opportunities Fund is clear: to deliver lower volatility, lower correlation, and lower drawdowns compared to traditional bond funds. By leveraging new tools like interest rate futures and credit derivatives, the fund is designed to provide clients with greater risk-adjusted returns.

Global currency investing

Christopher Chapman, who oversees Manulife’s global multi-sector product line, highlights the liquid alternative space has often been dominated by a North America-centric focus. But Manulife’s global multi-sector liquid alternative strategy, the Manulife Strategic Income Plus fund breaks the mold, offering a true go-anywhere approach. This allows the team to target key regions where central bank policies are diverging, such as Australia and Europe.

This isn’t just about tapping into a broader set of opportunities; it’s about being able to use active currency management in ways that most competitors don’t. Currency has traditionally been used as a tool for risk mitigation, but the Manulife global multi-sector fixed-income team takes it a step further.

The divergence in central bank actions across the world has created significant opportunities for currency and bond markets alike.

Chapman explains, “We anticipated a deceleration in inflationary pressures, and now we’re seeing central banks across the globe begin cutting rates. For instance, the Bank of Canada moved earlier than the Federal Reserve, causing Canadian bond yields to decline further compared to US Treasuries, which opens opportunities to go long on U.S. bonds while shorting Canadian bonds. Meanwhile, other central banks like the Reserve Bank of New Zealand and the European Central Bank have also joined in, creating pockets of opportunity globally.”

“One key region we’re focusing on is Australia. Despite recent bond market rallies, there’s still room for more as expectations around central bank rate hikes there have only recently started to shift.

Chapman further explains how the team leverages liquid alternatives to manage these positions. “We can look at intra-European fixed income, where bonds from countries like Italy might struggle under a weaker growth environment while higher-quality bonds, such as German ones, outperform. We use bond futures to express these kinds of trade ideas dynamically.”

Managing volatility and liquidity

Volatility has become a defining feature of today’s markets, making liquidity management critical for seizing opportunities when they arise. With alternative opportunities, Thiru uses government interest rate futures to extend or reduce duration and credit default swaps to add or reduce exposure to credit risk. For example, from June to July, Thiru’s team increased the fund’s duration from 2.9 years to 3.6 years by increasing our allocation to government interest rate futures from 2% to nearly 19%.

“We reduced our credit exposure by about 10% using credit default swaps, which was crucial during the stock market selloffs while rates were rallying,” Thiru says. “These tools allowed us to add meaningful returns for our funds, whereas using the cash market would have been costly and punitive in terms of liquidity and transaction costs,”

“We don’t have to go to emerging markets to generate high income. Yields recalibrated in North America two years ago, and now we can achieve 5-7% returns with high-grade investments, making it a safe jurisdiction to invest in.”

Thiru’s team focuses on short-duration corporate bonds, typically in the 2–4-year range, from top-tier North American companies. “We know the North American markets well, and with clear legal recourse for bondholders, it’s an environment where we can generate stable returns while mitigating risk. This allows us to focus on ‘clipping coupons’—investing in high-quality bonds with reliable yields,” says Thiru.

Chapman highlights the importance of managing portfolio duration and adjusting it based on changing market conditions. “Since our strategy launched in May, we’ve had about a one-year range in portfolio duration,” Chapman notes. “We actively manage this risk by shifting where the duration is coming from globally, adjusting based on credit spreads and valuations.”

While Chapman and team have embraced some high-yield opportunities, within that sector the focus skews defensive, favoring higher-quality, double-B rated bonds, and avoiding riskier triple-C credits.

On the currency side, their strategy remains dynamic. Manulife employs active hedging, particularly in regions like Mexico and Brazil, where currency swings have been notable. Chapman adds, “We can also use cross-currency hedges, like the Singapore dollar, where liquidity is high, and the hedge cost is low.”

The highest yields in a generation

The post-pandemic world has recalibrated bond yields, bringing fixed income back into focus.

But investing in fixed income comes with its own set of challenges. This is why capital preservation is the primary driver for fixed income investors. “People invest in fixed income for capital preservation first before income generation,” explains Thiru. “Negative correlation and risk management are the critical reasons we focus on this asset class.”

“We’re seeing the highest yields in nearly 15 years,” says Chapman. “This is a once-in-a-generation opportunity for fixed income investors to not only protect their portfolios but also generate solid, positive returns.”

Thiru adds, “What’s remarkable about this environment is how forgiving fixed income has become. Even with all the volatility, it’s tough to get negative returns when yields are this high. It’s an extremely investable asset class right now, and we’re positioned to take full advantage of that.”

The traditional value proposition of fixed income has been fully restored, making it an extremely investable asset class—especially when juxtaposed with equities, where risk has sharply risen. With volatility heightened in the equity markets, fixed income offers a compelling alternative for those seeking stability and dependable returns.

The Manulife Canadian Fixed Income team and the Manulife Global Multi-Sector Fixed Income team, like other portfolio management teams at Manulife, manage their own investment processes from start to finish. Both teams have full access to the firm’s global resources, including derivatives services, a global trading platform, risk and analytics, and credit research. Although the Manulife Alternative Opportunities Fund and the Manulife Strategic Income Plus Fund employ distinct strategies, they both leverage these extensive resources to navigate and capitalize on the fixed-income opportunities in today’s volatile market.

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