The turning of the calendar isn’t just an opportunity to celebrate; it’s also a time for reflection, for learning from experience, and for doing some serious looking forward about what to potentially expect, and resolve to do, in the year to come.
To that end, let’s reflect on the forces that drove fixed income returns in 2017 and draw a few lessons from the experience that may help inform future investment decisions.
Flatter, longer and narrower
Canadian bond yields rose across most of the curve in 2017. A lot of the upward momentum was disproportionately on the front end in response to the Bank of Canada’s two consecutive interest rate hikes in the summer, while yields fell from the 20-year point onward. As a result, the yield curve flattened and by the end of December was near inversion for the first time in a decade.
From a returns perspective, meanwhile, taking long duration risk was beneficial in 2017 as the long index delivered roughly 7% in total return, according to Bloomberg data. It’s instructive to note, for investors who follow script and rush into short duration exposures when central bankers are removing accommodation, that the short index generated a flat return for the year.
Finally, it was a banner year for credit, with spreads narrowing across investment grade, high yield and emerging markets.
So that’s the reflection. What are the learnings? Well, we think there are a couple screaming for attention in 2018.
The first is that active management is important for delivering above-market returns in this environment; the ability and agility to alter a portfolio’s asset allocation mix over time can deliver significant benefits.
The second learning is that increasing the breadth of a portfolio through global exposures can help enhance returns, simply by providing another opportunity set to exploit.
Aubrey Basdeo is a Managing Director and Head of Canadian Fixed Income for BlackRock. He is a regular contributor to The Blog in Canada.