Invesco Canada blog

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Avi Hooper | September 17, 2019

There’s more to a bond than its yield

Investors frequently focus on the yield to maturity that bonds pay, rather than recognizing the potential total returns that are available to global fixed income investors.

When people allocate their portfolios to equity markets, they rarely think about the dividend yield or whether the equity even pays a dividend. Yet, when it comes to investing in bonds today, the first comment is always that bond yields are so low.

Bonds may seem more complex to the casual observer, but only because the sources of returns are more diverse and less well understood. The three main contributors of total return include: price sensitivity to interest rates, price sensitivity to credit spreads and coupon carry.

For Canadian investors, there has been additional return contributions from currency carry. For example, we added 2.75% in extra annualized return (as at August 30, 2019) by buying bonds denominated in euros, and hedging euro currency risk back into Canadian dollars.

An example of comparative asset returns of a global growth company are shown here from Netflix (this particular bond is held in both Invesco Global Bond Fund and Invesco Canadian Core Plus Bond Fund). The company’s equity performed well over the years of subscriber growth. As competition in the sector continues to rise, however, expectations for the company’s growth are deteriorating.

Bond investors are concerned about cash flow generation, rather than earnings growth. At this stage of the life cycle, investment returns from debt are more likely to be rewarded.

Source: Bloomberg, as at Aug 30, 2019. All returns are in CAD.

The biggest concern among retirees is whether they will outlive their retirement nest egg. To preserve their capital, increasing exposure to lower volatility assets often becomes the largest anchor of their overall portfolio.Source: Bloomberg, as at Aug 30, 2019. All returns are in CAD.

Global bond markets are very diverse across countries and companies, different sectors of the economy and various capital structures that provide idiosyncratic return opportunities. Bond prices typically have between 20% and 30% of the price volatility compared to the company’s equity price volatility. Increasing the allocation to global bonds can help preserve capital while maximizing potential returns.



Inception date for
Invesco Canadian Core Plus Bond Fund is February 11, 2000. Inception date for Invesco Global Bond Fund is May 26, 2016.






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The above company was selected for illustrative purposes only and is not intended to convey specific investment advice.
Yield to maturity is the rate of return anticipated on a bond if it is held until the end of its lifetime.
Coupon carry refers to the portion of returns generated by a bond’s coupon payments over time.
Currency carry refers to the portion of returns generated by the interest rate differential between an investor’s home currency and the currency in which a bond is denominated.

Spread represents the difference between the yield on a corporate bond and a similar maturity U.S. Treasury bond. The spread may become compressed either as a result of rising Treasury yield or falling corporate bond yields. Yields fall as the value of a bond rises.
The opinions referenced above are those of the author as of Sept. 3, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.