Manulife outlines three phases to understand and capitalize on shifts in the fixed income market
In an article produced in partnership with Manulife Investment Management and Wealth Professional, Manulife Investment Management’s Capital Markets Strategy team developed a framework in late 2022 to understand shifts in the fixed income market, segmented into three phases.
Recent economic data indicating slower growth and persistent inflation has led to a cautious approach from investors. Bonds, traditionally offering stable returns and protection against equity downturns, saw a decline in prices as interest rates climbed, challenging traditional diversification strategies.
Kevin Headland and Macan Nia of Manulife Investment Management emphasize understanding the market phase.
The first phase, the “sweet spot,” capitalized on high yields from price declines in 2022. The second phase, “embrace duration,” extended portfolio duration in anticipation of interest rate cuts. The third phase involves taking on risk during economic downturns to capitalize on market recovery.
Nia stresses the importance of a regional perspective, noting the US navigates between phases one and two, while Canada and Europe are in phase two, with their central banks likely to cut rates sooner. Headland and Nia highlight the need for adaptable fixed income strategies amid complex economic conditions.
Volatility in the bond market requires patience. Nia notes that Canadian bonds increased by 6.7 percent last year, but missing key trading days would have significantly reduced returns.
Despite market challenges, Headland believes fixed income remains valuable, with current yields above long-term averages and bond prices below par, presenting opportunities for forward-looking investors.
Manulife Investment Management sponsors this material and advises considering individual circumstances and seeking professional advice before investing.
