The fixed income universe can still be a fertile ground for fund managers, who continue to see opportunities despite the challenging environment. Strategic bond funds may be best placed to take advantage. These funds have the flexibility to move their asset allocation significantly, shifting exposure to government bonds, investment-grade corporate bonds and high-yield bonds depending on the prevailing environment.
At present it could be said that expansionism is outweighing protectionism, which creates ‘good’ inflation. If protectionism becomes the norm, however, that would create inflation too, but this would be ‘bad’ inflation that serves no purpose and makes life difficult for everyone.
All this suggests that while fixed income opportunities remain, the low-hanging fruit that was so abundant in the past has all but gone.
Bond fund managers will have to work a lot harder to generate returns this year. Investors should continue to hold fixed income as a diversifier – away from, for example, equities – but they should have realistic expectations in terms of the risk-adjusted returns bonds can generate.
Michelle McGrade is chief investment officer at TD Direct Investing
Global fixed income performance
| Index name | 1 year TR | MTD | YTW as of Jan 31, 2017 | YTW as of Jan 29, 2016 |
| performance end Jan 31, 2017 (%) | performance Jan, 2017 (%) | (%) | (%) | |
| S&P 500 Bond Index | 6 | 0.4 | 3.3 | 3.6 |
| S&P US Treasury Bond Index | -0.8 | 0.3 | 1.7 | 1.2 |
| S&P Treasury Bond Current 10 Year Index | -3.3 | 0.2 | 2.5 | 1.9 |
| S&P US Aggregate Bond Index | 1.3 | 0.2 | 2.5 | 2.2 |
| S&P UK Gilt Bond Index | 4.3 | -1.8 | 1.3 | 1.5 |
| S&P UK Investment Grade Corporate Bond Index | 9.9 | -1 | 2.6 | 3.3 |
| S&P Eurozone Developed Sovereign Bond Index | -1 | -1.9 | 0.6 | 0.5 |
| S&P Eurozone Investment Grade Corporate Bond Index | 2.9 | -0.6 | 0.8 | 1.1 |
| S&P Municipal Bond Infrastructure Index | 0.1 | 0.5 | 2.7 | 2.1 |
Source: S&P Dow Jones Indices. Note: YTW = yield to worst. | ||||
