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Immunizing a Fixed Income Portfolio

Alfred Lee

Immunizing a Fixed Income Portfolio

  • Rising yields and inflation have created some challenges for fixed income investors in the fourth quarter to-date.1 Since the September 22 Federal Open Market Committee (FOMC) meeting, rates have moved higher across the curve, as the Federal Reserve (Fed) outlines its plan to tighten its monetary policy. This included the tapering of its asset purchase programs and guidance on when it may raise its overnight rate.
  • Given that yields repriced higher across the curve, the market was likely underestimating the Fed’s willingness to act, despite many indications that it would taper in late 2021.
  • Last week, rates in Canada experienced another shock on the back of the Bank of Canada’s (BoC) hawkish forward guidance of its overnight rate. With the BoC signalling “slack to be absorbed in the middle quarters of 2022,”2 with the market now pricing in multiple-rate hikes next year. The futures market is now actually pricing the first hike to be as early as January. The front end of the curve has experienced the largest impact, with the two-year Government of Canada (GoC) rising 65bps to 1.01% since the beginning of September.
  • Interestingly, while short rates have continued to move higher, long rates in Canada have recently stabilized, with the 30-year GoC even falling 13bps in the last week. This suggests the market may be pricing slower economic growth over the long run.
  • In addition to rising rates, inflation both north and south of the border continues to come in well above the target rates of the central banks. Canada’s latest year-over-year Consumer Price Index (CPI) came in at 4.4%, while the U.S. had a recent reading of 5.4%.1 With continued supply chain disruptions and additional demand likely to come with a further reopening of the economy, its likely inflation gets worse before it gets better.
  • Furthermore, countries having varying methods of coming out of the pandemic will likely cause supply chain disruptions to continue. Lower inventory recently led U.S. Annualized (Quarter-over-quarter) gross domestic product (GDP) to come in notably lower than expectations. Should this continue, rates on the long-end could continue to soften, meaning some duration exposure may be warranted.


Outside of default, the greatest challenges for bond investors are inflation and rising rates. In addition, there are many uncertainties that remain, including the ongoing pandemic, which can derail the economic recovery. As a result, a bond portfolio needs to protect against three main risks today.

The three fixed income ETFs are combined for the following reasons:




1 As of October 28, 2021.

2 Bank of Canada, “Bank of Canada maintains policy rate and forward guidance, ends quantitative easing,” October 27, 2021.

Alfred Lee

Immunizing a Fixed Income Portfolio

  • Rising yields and inflation have created some challenges for fixed income investors in the fourth quarter to-date.1 Since the September 22 Federal Open Market Committee (FOMC) meeting, rates have moved higher across the curve, as the Federal Reserve (Fed) outlines its plan to tighten its monetary policy. This included the tapering of its asset purchase programs and guidance on when it may raise its overnight rate.
  • Given that yields repriced higher across the curve, the market was likely underestimating the Fed’s willingness to act, despite many indications that it would taper in late 2021.
  • Last week, rates in Canada experienced another shock on the back of the Bank of Canada’s (BoC) hawkish forward guidance of its overnight rate. With the BoC signalling “slack to be absorbed in the middle quarters of 2022,”2 with the market now pricing in multiple-rate hikes next year. The futures market is now actually pricing the first hike to be as early as January. The front end of the curve has experienced the largest impact, with the two-year Government of Canada (GoC) rising 65bps to 1.01% since the beginning of September.
  • Interestingly, while short rates have continued to move higher, long rates in Canada have recently stabilized, with the 30-year GoC even falling 13bps in the last week. This suggests the market may be pricing slower economic growth over the long run.
  • In addition to rising rates, inflation both north and south of the border continues to come in well above the target rates of the central banks. Canada’s latest year-over-year Consumer Price Index (CPI) came in at 4.4%, while the U.S. had a recent reading of 5.4%.1 With continued supply chain disruptions and additional demand likely to come with a further reopening of the economy, its likely inflation gets worse before it gets better.
  • Furthermore, countries having varying methods of coming out of the pandemic will likely cause supply chain disruptions to continue. Lower inventory recently led U.S. Annualized (Quarter-over-quarter) gross domestic product (GDP) to come in notably lower than expectations. Should this continue, rates on the long-end could continue to soften, meaning some duration exposure may be warranted.


Outside of default, the greatest challenges for bond investors are inflation and rising rates. In addition, there are many uncertainties that remain, including the ongoing pandemic, which can derail the economic recovery. As a result, a bond portfolio needs to protect against three main risks today.

The three fixed income ETFs are combined for the following reasons:




1 As of October 28, 2021.

2 Bank of Canada, “Bank of Canada maintains policy rate and forward guidance, ends quantitative easing,” October 27, 2021.

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