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Fixed Income

Flexibility is required

This table features text accompanying heat diagrams for Fixed Income (Developed markets sovereigns and U.S. corporate credit). The heat diagrams, gauging Manulife Investments' outlook from Bullish to Bearish, indicate a stronger than neutral view on emerging market equities, a neutral posture on International developed market equities and U.S corporate credit and a less than neutral view on developed market sovereigns, along with detailed rationales for each position.

Lower yields around the world create issues for income focused investors

Although global sovereign bond yields may have bottomed and have started to increase in some areas, they won’t be going back to their long-term averages in the near term. In addition, approximately $18 trillion USD of global bonds have a negative yield.

10‑year government bond yields (%)

This diagram takes the form of a global map, that lists the sovereign bond yields and credit ratings of various countries. It shows that a number of high-rated countries have yields that are low or even negative, with the latter representing US$18 trillion in issues.

Source: Bloomberg as of March 31, 2021. Ratings are from Standard & Poor’s, and are subject to change. Foreign investing, especially in emerging markets, has additional risks, such as currency and market volatility and political and social instability. The commentary on this page is that of Manulife Investment Management. Performance histories are not indicative of future results.

The yield curve will likely continue to steepen in a rapid reopen

The view is for the U.S. Treasury yield curve to continue steepening as longer-term interest rates rise. We believe that the 2021 environment will be one of accelerating growth or inflation, in which we’ve historically seen an average increase in the 10-year yield of 50 bps, with a standard deviation of 100 bps.

U.S. Treasury curve

March 31 vs one month and six months ago

This chart plots the US Treasury yield curve from 1 month to 30 year maturities. There are three lines representing the yield curve shape 6 months ago, 1 month ago and as of March 31, 2021. While the slope of each line starts flat and then moves higher, the steepness fro 1 month ago is greater than 6 months ago and the most recent is steeper than both.   There is also a bar chart on the same graph showing the change in yield for the various maturities from 1 month and 6 months ago. The 10 year has increased 0.08% in 1 month and 0.27% in 6 months. The 20 year has increased 0.09% in 1 month and 0.28& in 6 months.

Source: Manulife Investment Management, Bloomberg, as of March 31, 2021.

Move to the better relative opportunity

In an environment of improving global economic growth, yield curves are likely to steepen. Typically, when this happens, credit outperforms government bonds and lower duration outperforms longer duration. In fixed-income, it’s important to understand the landscape going forward and be able to move to the better relative opportunity.

In this chart it illustrates that In this low and even negative yielding environment, the need for a dynamic fixed income strategy is all the more important as the various types of fixed income perform differently in different environments. The chart shows data for Global Bonds, US Aggregate, US Treasury, US Credit, US High Yield Bonds, US Floating Rate, Canadian Bond Univese, Canadian Government Bonds, Canadian Corporate Bond, Canadian Short Term Bonds and Emerging Market Debt. The data starts at 2006 and includes the first quarter of 2021.

Source: As of March 31, 2021. Floating rate (S&P/LSTA Leveraged Loan Index), Canada bond universe (DEX Universe Bond), Canada investment-grade corporate bonds (DEX Corporate Bond), Canadian government bond (DEX Federal Universe Bond), Canadian short-term bonds (DEX Short Term Bond), global blonds (Barclays Global Aggregate), U.S. high-yield (BofA ML US High Yield Master II Unconstrained), emerging market debt (JPM EMBI Global Diversified Index)

Canadian dollar remains tied to oil prices

Recently, the loonie’s relationship to interest rates has completely broken down and the shorter‑term moves can be entirely attributed to the price of oil, specifically West Texas Intermediate (WTI). As oil prices have rallied more recently, so too has the Canadian dollar. Expect the Canadian dollar to continue its appreciation relative to the U.S. dollar. We believe it’ll be between US$0.79–0.81, with risk to the upside over the next six to 12 months.

CADUSD vs Fair Value Model (CADUSD) to Oil

Last 10 years

This chart illustrates that the relationship between the CAD/USD exchange rate and a fair value model based on the historical price of oil. It shows the data of CAD USD Fair value based on Oil and Actual CAD/USD, starting at 2014 and ends at March 31, 2021. The current Canadian/USD value is at US dollars 0.7961, and the fair value model would suggest an exchange rate of US dollars 0.8317 at March 31 oil price of US dollars 59.16

Source: Manulife Investment Management, Bloomberg, as of March 31, 2021.

Manulife Investment Management’s sample strategy

This proportional bar chart shows a rough breakdown, in percentage terms, of a sample portfolio of Canadian, U.S. and international equities and fixed income, including a brief outlook discussion for each asset class.

Canadian equities

• Favour a selective approach to Canadian equities.

• Consider diversifying business risks, not just sectors.

US Equities

• Look for opportunities to take advantage of market dislocations.

• Consider dollar‑cost averaging into equities.

International developed market equities

• Consider less constrained strategies that can seek out opportunities wherever they may present themselves.

Emerging Market equities

Opportunities may exist within the emerging markets, specifically in the Asia ex‑Japan region.

Fixed Income
• Favour flexible strategies that can seize opportunities wherever they may be.

•Consider using different types of bonds for different objectives, whether it is downside protection or enhanced yield.

•Be mindful of the potential currency impact on global allocations.

Source: Manulife Investment Management as of March 31, 2021. For illustration purposes only. Performance histories are not indicative of future returns. The information in this document does not replace or supersede KYC (know your client) suitability, needs analysis or any other regulatory requirements. Clients should seek the advice of professionals before making any investment decisions.