Fixed income still matters. And the bonds you pick matter even more.

After a multi-decade bull market in bonds, fixed income has become a decidedly bearish environment. The threat of rising interest rates has caused a spike in yields and driven down the price of longer-dated maturities with startling speed. As well, key central bank rates are effectively at zero, making income generation difficult. And returns aren’t always keeping up with inflation – in fact, real yields are often negative. This article looks at how we are addressing these challenges by broadening our source of returns, and why bonds - despite the current headwinds - should still be considered a key part of your plan members’ portfolios.

Bonds: still a core building block in portfolios

Despite the threat of rising interest rates, we believe that fixed income securities will continue to be important building blocks in target date funds and plan member portfolios. Over time, fixed income securities have provided four key benefits: 

  1. Capital preservation: Higher quality fixed income securities issued by entities such as governments, corporations and financial institutions are an important source of potential capital preservation and security.
  2. Income: The coupon interest payments on fixed income securities are an important source of income for investors. In fact, coupon income provides the majority of returns on fixed income assets. This, in addition to being a buffer against declines in capital when interest rates rise.
  3. Liquidity: Deep secondary markets exist for a broad universe of fixed income securities, allowing investors to readily liquidate or rebalance portfolios.
  4. Diversification: Higher quality fixed income returns have generally shown low correlations to returns from riskier asset classes. Therefore, they may provide portfolio diversification benefits by reducing return variability in a portfolio. 

Looking beyond government bonds for enhanced returns

Given the current market conditions, it can be challenging to generate income, find liquidity and preserve real (inflation adjusted) capital over longer periods. Indeed, Canada’s broad fixed income market currently generates an average annual yield of around 1.7%. This is below the 2% mid-point of the Bank of Canada’s target inflation range of 1% to 3%.

Canada’s broad fixed income market has a strong bias towards high-quality, lower- yielding government issues. And it has a fairly narrow corporate opportunity set, challenging the longer-term return and income generation potential of this traditional core building block. 

FTSE Canada Universe Bond Index

Modified duration 7.92 years
Average yield 1.73%

Source: FTSE. Data as at March 31, 2021.

Given this, a broader source of bond return drivers can play an important role in enhancing returns. To effectively construct such an allocation, we focus on:

  • Building a strong foundation in core Canadian bonds.
  • Investing in a wide range of complementary return sources across rates, geographies, credit and liquidity – potentially helping to generate reasonably consistent excess returns over Canadian bonds.
  • Developing a flexible multi-manager structure that can seamlessly evolve with changing market conditions, both shorter-term tactically, as well as strategically over longer periods.  


We believe that over the long-term fixed income will continue to play a pivotal role in portfolio protection. As such, we continue to take a holistic view of fixed income within the broader portfolio, believing that while interest rates are historically low, fixed income should continue to support portfolio protection and diversification. In addition, positioning within the fixed income market is equally important. And given today’s market conditions, this makes understanding the role of various underlying components of a fixed income portfolio more critical than ever. To that end, the role of multiple building blocks, return sources and tactical asset allocation will be key to navigating the current yield environment.  

Important information

Information contained in this document is provided for information purposes only and is not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard.  Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment fund managed or sub-advised by SLGI Asset Management Inc. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell securities.

Information herein has been compiled from sources believed to be reliable as of the date of publication, but no representation or warranty, express or implied, is made with respect to its timeliness or accuracy.

This document may contain forward-looking statements about the economy, and markets; their future performance, strategies or prospects. Forward-looking statements are not guarantees of future performance and are speculative in nature and cannot be relied upon. Forward-looking statements involve inherent risks and uncertainties about general economic factors, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. You are cautioned to not place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement. Before making any investment decisions, you are encouraged consider these and other factors carefully.

Group Retirement Services (GRS) are provided by Sun Life Assurance Company of Canada. Sun Life Granite Target Date Funds are segregated funds of Sun Life Assurance Company of Canada, managed on a sub-advisory basis by SLGI Asset Management Inc. Sun Life Granite Target Risk segregated funds launched November 2009 and were managed on behalf of GRS by Sun Life Assurance Company of Canada. In 2012, SLGI Asset Management Inc. launched Sun Life Target Risk mutual funds, at which time the Sun Life Granite Target Risk segregated funds were closed and new funds were created that invest in mutual funds with a similar mandate to each of those funds. 

All investment solutions are offered as segregated funds for group retirement plans exclusively by Sun Life Assurance Company of Canada, through Sun Life Group Retirement Services, a member of the Sun Life group of companies.


Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada, and Sun Life Financial Trust Inc. 

SLGI Asset Management Inc. is the investment manager of the Sun Life Mutual Funds, Sun Life Granite Managed Solutions and Sun Life Private Investment Pools.

© SLGI Asset Management Inc. and its licensors, 2021. SLGI Asset Management Inc. is a member of the Sun Life group of companies. All rights reserved.