Active management key as bond markets reprice risk

A key question for bond investors is how to position amid higher energy prices, geopolitical tensions, rising inflation and growth risks. The answer lies in active management, says Adam Ditkofsky, senior portfolio manager, global fixed income at CIBC Global Asset Management.

In an April 28 interview, Ditkofsky said investors need to focus on balancing duration, yield curve exposure and sector risk.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Global Asset Management.

Ditkofsky said keeping duration neutral in recent months would have helped limit downside risk, leaving portfolios less affected by March’s energy-driven yield spike.

For yield curve exposure, he maintains a modest bias towards longer maturities, limiting exposure to rate-sensitive short-term bonds. As the U.S.-Iran conflict escalated, rate-cut expectations faded and short-term yields rose more than long-term yields, Ditkofsky said.

“We saw what was effectively a yield curve flattener, as short-term rates moved higher. And the move was more pronounced in shorter-dated bonds than longer-dated bonds. So we were well positioned from that perspective as well,” he said.  

On sector exposure, Ditkofsky is taking a defensive stance on corporate bonds. Amid emerging stress in private debt and AI financing, he’s focused on high-quality, short-duration credit, and has added credit protection.

“The main aspect is that we’ve stayed extremely disciplined, taking advantage of the market volatility and credit spread widening,” he said. “So we had increased credit exposure where we saw corporate bonds being cheap, and positioned the portfolios to account for the fact that perhaps too many rate hikes have been priced into the market.”

Over the next 12 months, Ditkofsky expects one Fed rate cut, and thinks there’s a small chance that the Bank of Canada could hike to maintain inflation expectations. However, a pickup in core inflation or a sharp rise in inflation expectations could shift his outlook toward further tightening.

Canada is more rate sensitive, he said, due to household debt levels and the frequency of mortgage renewals.

“As a result, restrictive policy tends to transmit into activity with less lag than in the U.S., which is one reason we view the hurdle for additional hikes as relatively high if growth continues to soften.”

Opportunities

For the first time in over a decade, Ditkofsky said bonds are finally doing their job: offering investors meaningful income again.

He sees value in five- to seven-year investment-grade corporate bonds. “You’re getting real yield from high-quality companies without taking excessive duration risk,” he noted.

Ditkofsky is also selectively adding to high yield, focusing on strong, cash-generating companies that can withstand elevated energy prices.

And he likes high-quality hybrids for their attractive yield and spread over investment-grade bonds. These securities, he said, are partly insulated from rising yields due to five-year rate resets and fixed spreads.

“In many cases, these issues also include yield floors in the event that yields drop at the time of reset,” he said. “So we think there’s good protection, and investors are getting good compensation for these structures.”

The overall message is clear, he said. Fixed income offers real yield and opportunity, while at the same time, downside risk is also very real.

“We’d argue portfolio precision is very critical, and professional active management can be far more rewarding than passive management in this environment,” he 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.