Fund Library News Wire
| Tuesday, November 27, 2018
By Aubrey Basdeo, Managing Director, Head of Canadian Fixed Income,
In a well-diversified portfolio, as one asset class declines, another
should rise, mitigating risk and minimizing losses. Yet that is proving to
be easier said than done. As fixed-income and equity markets seem to have
shifted to risk-off, investors are struggling to find assets that move in
the opposite direction from other assets, leaving portfolios exposed to
synchronized losses even if they are diversified. Specifically, the recent
performance of stocks and bonds has been moving in the same direction:
So how to achieve better diversification in times like these? In our view,
bonds are still a reliable diversifier in a market rotation, especially as
we get late in the business cycle. Better balancing risk exposure in a bond
portfolio is critical to realizing the benefits of diversification.
As it stands, investors basically have two choices. They might find short
rates extremely attractive, primarily for income generation, but that
approach will be limited in its ability to provide a counterbalance in the
event of a tail-risk event. The alternative is to assume longer-duration
exposure with a tilt towards interest rate risk, which would provide
diversification against a growth slowdown as well as an insurance policy
against a tail-risk event.
For those reasons, we are constructive on the bond market. We see it priced
appropriately, with a bias toward downside risks as higher rates bite into
debt-laden consumers’ ability to spend. We continue to believe the Bank of
Canada and the U.S. Federal Reserve are likely to take a pause in the
tightening cycle early in 2019, as growth cools and inflation expectations
remain well anchored. Going forward, we expect a flatter yield curve,
monetary tightening and a corresponding liquidity drain, and positive
front-end rates to persist into the late cycle, creating more volatility in
If that turns out to be the case, then benchmark duration in fixed income
can help to diversify a portfolio
Aubrey Basdeo, Managing Director, Head of Canadian Fixed Income, BlackRock, is a member of
the Product Strategy Team within BlackRock's Model-Based Fixed Income
Portfolio Management Group. He leads the product strategy effort in
Canada for both the Institutional and iShares businesses.
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