Strategies to navigate Canada’s ‘worst ever’ bond selloff

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Shifting to actively managed products, shortening bond durations and considering alternatives are some ways investors can weather the volatility

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Now, Mr. Davis is among a growing chorus of experts warning that the bond market requires investors to pay closer attention. That means being able to alter duration and credit quality strategies nimbly or even moving part of a fixed income allocation into alternatives. For advisors looking to hedge against rising inflation, Mr. Farooq warns even real-return bonds, which are linked to inflation, are down 13 per cent in Canada so far this year, “so you can’t even use that as a place to park your [money].”One strategy that he, along with Mr. Davis and Mr. Kresic, points out is to move into shorter-maturity bonds as they’re less sensitive to interest rate hikes. That’s already a growing trend.

Active management, which Mr. Farooq refers to as “unconstrained mandates,” is ideal in the current environment because it allows outsourcing to an expert who is going to make calls in a portfolio that can make up for an advisor’s lack of knowledge or time. User-pay infrastructure such as toll roads, ports, railroads and airports are becoming increasingly popular options, he says, as they provide a hedge against inflation as well as a reliable income stream.

Meanwhile, Mr. Davis of BMO GAM is not as concerned. His team is preparing to buy “a lot of credit” because the economy is still good and they still expect above-trend growth for the next two years – even with rising interest rates.

 

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