Exploring the Benefits of Fixed Income in Today’s Market

Fixed income investments continue to play a vital role in diversified portfolios, especially in a shifting interest rate environment. Depending on your financial goals, they offer several key advantages:

1. Diversification from Stock Market Risk

Fixed income assets typically carry lower volatility than equities, helping to cushion portfolios during market downturns or geopolitical uncertainty.

2. Capital Preservation

For investors nearing retirement or seeking stability, fixed income can help preserve capital while generating income. These assets are designed to return principal at maturity, making them a reliable choice for conservative investors.

3. Income Generation

Fixed income products provide regular income through interest or coupon payments. This steady cash flow can be especially valuable in retirement or for meeting ongoing financial obligations.

4. Attractive Total Return Potential

While traditionally viewed as lower-risk, fixed income can still offer compelling returns—especially when investors are willing to explore credit or duration risk strategically.

Interest Rate Landscape: A Turning Point

After a period of aggressive tightening, both the Federal Reserve and the Bank of Canada have recently shifted course:

  • Bank of Canada: Cut its benchmark rate to 2.25% in October 2025, citing structural economic challenges and subdued inflation.
  • Federal Reserve: Lowered its federal funds rate to a range of 3.75%–4.00%, responding to labor market weakness and moderating inflation.

These moves suggest that we may be past the peak in interest rates, opening the door to more favorable conditions for fixed income investors.

Preferred Shares: A Timely Opportunity

In this environment, perpetual and rate reset preferred shares stand out as particularly attractive:

  • Higher Yields: With interest rates still elevated, preferred shares are offering yields in the 5–6% range, which is compelling compared to traditional bonds or GICs.
  • Tax Efficiency: Preferred share dividends benefit from the Canadian dividend tax credit, making them more tax-efficient than interest income—especially in non-registered accounts.
  • Rate Resets: These shares adjust their dividend rates periodically based on prevailing interest rates, offering a hedge against rate volatility.
  • Perpetuals: Provide stable, long-term income and may offer capital appreciation if rates decline further.

Recent redemptions and acquisitions in the preferred share space have also created reinvestment opportunities, with floating and rate reset issues outperforming in recent months.

Navigating the Landscape with Confidence

The fixed income market is evolving, and opportunities are emerging for investors who understand the nuances of interest rate cycles, credit risk, and tax efficiency. Our team has deep experience navigating this landscape and can help tailor strategies that align with your goals.