There are various factors that influence a bond's value with the most prevalent being interest rates. For a basic bond, the interest payments (coupons) remain the same throughout the life of the bond and when this coupon is equal to market interest rates, a bond is priced at par (usually $100).

When interest rates rise however, newly issued bonds at higher coupons will look more attractive. As a result, previously issued bond prices will decrease and trade below par (under $100). The opposite is true when rates decline.

With interest rates increasing this year, and by extension bond prices falling, it is clear to see why conservative investors have felt compelled to rethink their investment in bonds and want to reallocate those funds elsewhere, like cash or Guaranteed Investment Certificates (GICs). Many have sold investments, fearing continued negative returns and are unsure of what to expect moving forward as we face the real prospect of a recession.

To help get a better understanding of how bonds work, why we have experienced negative returns, and why investors should consider remaining invested in fixed income, TD Asset Management Inc. (TDAM) has recently authored an article titled Bailing on Bonds - Why now is not the time to turn your back on bonds. In addition to the article providing a better understanding of how bonds function, it digs deeper and gives investors clearer insight into why now is not the time to abandon fixed income within portfolios.

So why are bonds in the negative this year? The short answer is higher interest rates. Because inflation remains well beyond central bank targets, central banks have aimed to slow the economy through raising interest rates, which in turn, pulled down bond values. This situation is sort of a double-edged sword for investors.

High inflation is a headwind to fixed income since it typically leads to raising interest rates (falling bond values), but it leads to a high correlation between stocks and bonds which weakens their diversification advantage in balanced portfolios. To boot, inflation also erodes the purchasing power of fixed income cash flows.

Aside from not turning your back on bonds now, TDAM feels that there are also several compelling reasons why investors should view them in a more favourable light.

• High and attractive levels of income - Despite this year's plunge in fixed income returns, the asset class still holds value within a diversified portfolio. With aggregate bond yields currently nearing 5%, this is an impressive source of income for conservative investors. Much higher than dividends or fixed income yields over the past decade.
• Fixed income outperforms in recessions and market crises - Rising rates slow the economy and can potentially lead to a recession. This may sound like bad news, but for bond investors, it presents an opportunity. Historically, bonds have outperformed in times of market struggle as yields tend to fall as inflation and growth decline during a recession. Falling yields and a flight to safe assets (away from more riskier assets like stocks) supports fixed income returns.
• Tax advantages - Fixed income yield is a mix of coupons paid to the investor and the bond price moving to par (flat) as it reaches maturity. As a result, part of the fixed income returns one can expect is capital gains and not entirely income (unlike deposit-based investments) and as a result, fixed income can be a tax advantaged way to invest for conservative investors since some of the returns are taxed more favourably compared to deposit based investments.
• Active management - Active managers do not just invest in a broad index but are selective in the fixed income positions they take. Views on overall interest rate risk (duration), the distribution of that risk, the credit exposure (corporate vs. government), and foreign exchange moves can all add incremental performance and income to an active fixed income fund.

本文所含資訊由道明資產管理有限公司提供，僅供參考。內容乃出自可靠之來源匯編而成。本文並不提供任何財務、法律、稅務或投資建議。衡量個別投資、稅務或交易策略時，應考慮個別人士的目標和風險承受能力。

本文檔中的部分陳述可能包含預測性的前瞻性陳述（「FLS」），其中包含「預計」、「預期」、「打算」、「認為」、「估計」和類似的前瞻性表述或其否定形式。前瞻性陳述基於當前對未來普遍的經濟、政治、相關市場因素（例如利率和匯率、股票和資本市場）以及普遍經營環境的預計和預測，並假定不發生稅法或其他法律或政府管制方面的任何變動或災難事件。對於未來事件的預計和預測本身受無法預見的風險和不確定性的影響。此等預計和預測可能在未來並不準確。前瞻性陳述不是對未來表現的保證。實際發生的事件可能與前瞻性陳述明示或暗示的事件存在實質差異。包括上文所述各項因素在內的多個重要因素均可能造成這種背離。您不應在任何程度上依賴於前瞻性陳述。

道明資產管理有限公司 (TD Asset Management Inc.) 是道明銀行 (The Toronto-Dominion Bank) 的全資擁有附屬機構。

®TD標誌和其他TD商標為道明銀行或其子公司的產權。