Bonds in a Rising Rate Environment

Bonds are a popular instrument for municipal governments and ONE Investment offers two professionally managed bond portfolios. Bonds are a key component in a diversified investment portfolio, providing a source of recurring income for investors. Rising interest rates can worry bond investors – but the current interest rate environment isn’t necessarily cause for concern. 

That’s because the financial markets are driven by investor expectations. If investors already expect something to happen, its impact is typically already reflected. It’s been widely anticipated that the Bank of Canada and other global central banks will start raising interest rates. As a result, yields have already gone up. The yield on the Government of Canada two-year notes, for example, has increased by 1.5% since September. The Bank of Canada only increased its policy rate once, raising it by 0.25% to 0.5% in early March. Bond yields already seem to reflect further anticipated rate hikes by the Bank of Canada.

When yields go up, bond prices should go down. It is important to remember that unlike stocks, the value of bonds comes from the stream of interest they pay, rather than by increased wealth creation. As such, bond portfolios are a good way to manage risk as part of a diversified portfolio. Investment managers will select bond securities and manage the maturity profile of the portfolio to maximize value.

In all, a diversified portfolio with an asset mix that balances fixed income products and equity exposure helps to better manage risk, whether it’s rising interest rates or fluctuations in equity markets. ONE Investment’s products, investment managers and expert staff all help municipalities to navigate markets to protect investments and improve returns over the long-term.