The fixed income portion of a balanced portfolio is supposed to provide stability, but lately bond markets are not holding up their end of the bargain.
The experience is different for holders of bond funds. In a rising interest rate environment, the value of bonds held in a fund fluctuate from what is usually a $100 face value. For instance, the government of Canada bond issued last year at a $100 price, maturing in 2031, paying 1.5 per cent annual interest is trading Wednesday at C$92.50. The 1.5 per cent coupon payment is less attractive because rates are rising. A new 10-year bond issue would have an annual interest in the 2-2.
In a recent research report, Scotia Capital strategist Hugo Ste-Marie detailed the asset class performance during the inflationary 1970s. Mr. Ste-Marie first noted a number of differences between then and now – developed world growth is far less resource intensive for one – but still found the relative returns instructive.
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