Higher yields restore bonds’ role as key diversifier

Despite ongoing volatility, bonds continue to act as a key diversifier, partly because of higher starting yields compared to the last decade, says Leslie Alba, head of portfolio solutions, total investment solutions, CIBC Global Asset Management.

Alba said that from 2012 to 2022, Canadian government bond yields averaged 1.7%, and 2% in the U.S. At the end of March 2026, Canada’s 10-year government bond yield was 3.47%, and the U.S. 10-year treasury yield was 4.32%.

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“The bulk of our expected return for bonds over the long term does come from income, rather than large price gains,” Alba said. “And that’s important, because with inflation still somewhat stubborn and policy rates closer to what we view as neutral, we do see less room for yields to fall compared to the last year, which does reduce the odds of large bond rallies.”

The key is to look at the full economic cycle, which shows that bonds have historically helped reduce portfolio volatility, she said. Bonds diversify well in growth slowdowns and recessions, but less so in inflation-driven selloffs, reflecting duration sensitivity.

“That’s not a failure of bonds,” she said. “It’s simply how duration or bond-price sensitivity responds when inflation expectations shift. So government bonds continue to act as an important ballast in our multi-asset portfolios.”

While corporate bonds spreads remain at historic tights, Alba is confident being overweight in investment-grade credit. Corporate bonds offer higher yields compared to government due to default risk. And for high-quality issuers, that risk is low and has historically been well compensated.

Corporate bonds also have shorter maturity dates compared to government bonds, as well as lower duration and interest-rate sensitivity, she said.

“Our conviction really is not based on the idea that spreads will tighten further. It’s based on the level of all-in yields, and the way high-quality credit tends to behave over full cycles.”

Alba said while spread widening can be uncomfortable, staying the course is important. For instance, an investor who bought Canadian corporate bonds at the beginning of 2020, when spreads were near the tightest, earned 3.2% annualized return through December 2025, despite a drawdown of 12.7%.

Also, corporate bonds tend to react less to geopolitical headlines, and more to how an event impacts growth, inflation and financial conditions overall.

“We size credit thoughtfully, and we’re leaning into higher-quality issuers, strong diversification and liquidity, while maintaining that strategic, constructive view on corporate bonds overall,” Alba said.

AI update

Diversifying to capture upside in AI, while managing volatility and valuation risks is key, she said. The first step is to diversify across asset classes, including infrastructure build outs and enterprise adoption.

“We’re looking for exposure where AI is a revenue driver, and also where it’s a productivity catalyst, and where it’s a part of the infrastructure stack,” Alba said.

Also diversify across regions. Alba is constructive on the U.S., which is supported by innovation leadership, deep capital markets, and strong profitability. She also recognizes China’s rising tech strength and manufacturing scale.

But there are risks to investing in China, including geopolitical, state intervention and valuation discounts. The push-pull between the U.S. and China underscores the need for geographic diversification, she said.

“We maintain allocations to low-volatility, high-dividend strategies, and that’s to help mitigate downside risk, while preserving our participation in equity markets,” Alba said.

This article is part of the Advisor To Go program, sponsored by CIBC Global Asset Management. The article was written without input from the sponsor.