Fixed income still attractive despite economic risks

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Gino Di Censo, vice-president, global fixed income, CIBC Asset Management 

* * * 

Given the strong bond returns, despite the tariff and political uncertainty, what risks do we see as most likely to disrupt the resilience in 2026? We definitely saw robust performance in the bond markets in 2025. It took a bit of a breather, I’d say, in December, but generally it was a fairly strong year for the fixed-income market. 

Several things could challenge this resilience in 2026. I think one of the more prominent ones is a sharper than expected slowdown in the U.S. and Canadian labour markets, which could heighten recession risks. We just look at the U.S. and some statistics. Unemployment had, at least towards the end of the year, was reaching a four-year high, and their other measures also look relatively weak, so unemployment, small business hirings, there’s been more job cut announcements. 

And then Canadian employment to the end of the year had stabilized, but unemployment remains elevated at around 7%, and the unemployed and job vacancy rates remain high at the end of December as well. And so, these could create pressure on the economies. 

I think another factor to consider is persistent inflation — services inflation and wage pressures that we’re seeing. I think the changes to Canada’s immigration policy should help reduce some slack in the labour force, but at the same time, it can have a negative impact on consumer spending, and might have a negative impact on wage inflation as well. 

And so these are some of the things we’re being mindful of. 

To take another angle, there are concerns about political interference in the U.S., around central banks and their policies, and particularly, with respect to the upcoming Fed chair appointment, so that could really undermine credibility, impact yields, etc. And so this is another factor we’re watching. 

And finally, the other area I’d say that could pose a risk is any slowdown in AI-related capital expenditures, which could negatively affect sectors that were relying on technology infrastructure. In 2025, AI spend and AI-related companies had done tremendously well. And so, of course, there is that risk. 

And then the last thing I would say is renewed fiscal concerns or debt-ceiling debates could lead to more elevated long-term yields, and then market volatility as well. 

* * * 

How are we positioning portfolios to manage these risks? So, our approach is rooted, really, in resilience and flexibility. The curve now is very steep, and what this means is there is compensation for moving out of the curve. But we are being cautious and don’t want to extend ourselves too far. We are taking more exposure in defensive corporate credit, alongside high-quality issuers with strong fundamentals as a defensive play, should we see some more economic weakness or spread-widening events. 

We’re also maintaining modestly long duration positions in our fixed-income portfolios. And again, this is really to hedge against any potential spread widening. I think active management is key to protect against these risks. 

And lastly, I’d say, above all, we’re prioritizing diversification across regions, sectors and asset classes to help mitigate risk and capture opportunities as the cycle matures. 

* * * 

How does the persistence of a K-shaped U.S. economy influence our outlook for growth and credit risk? First of all, we are seeing a K-shaped recovery in the U.S., and by the way, we’re seeing this as well in Canada, but to a lesser extent.  

This is really where high-income households remain resilient or growing, while lower-income groups face greater strain. And this really creates a mixed growth outlook. 

While headline economic resilience persists — and I cited that earlier — I think underlying vulnerabilities, especially among those lower-quality issuers and consumer-facing sectors do face increasing credit risk if the lower-income groups continue to face challenges. 

And so, strong fundamentals and policy easing are continuing to support credit markets, but the divergence in household finances means that we have to be selective in the types of credit we’re investing in. So, focusing on sectors and issuers that have robust balance sheets, have less exposure to some of those weaker consumer segments, for example. 

* * * 

With investment-grade spreads near historic tights, where do we see attractive risk-adjusted opportunities in credit? So, I would say an important point here is that corporate bond yields still look attractive, despite being as expensive as they are in your historic tights, from a spread perspective. 

If you look at corporate bond yields relative to, say, stock dividends yields, they actually look very attractive relative to historical norms. And so, we think this should provide us cushion in the event of a hard landing, or an economic slowdown, or a significant spread widening event. 

And so, we think credit fundamentals still remain strong, despite the spreads being near historic tights and valuations being rich. And I think this is supportive for spreads. There are still support for credit fundamentals going forward. 

We think credit spreads will also benefit from expectations of further rate cuts by the Fed, and strong momentum factors, with net supply only modestly increasing. And so, you’re not getting a ton of new issuance in the market, which is another big supporter of those spreads. 

And then we are certainly aware that things look rich. We argue — for the reasons I’ve just stated — that we think this richness can continue. But we’re being proactive and cautious. And so, we are deploying capital where we see attractive risk-adjusted returns, and focusing on those high-quality corporates, those non-cyclical sectors that I had mentioned. 

And then lastly, from a positioning perspective, being slightly longer duration than the benchmark to help protect against any spread widening. So, we continue to see value, in summary, in the corporate bond market and the IG market despite spreads being at historical tights. But we’re being cautious, given potential concerns that I outlined at the beginning of this conversation. 

* * * 

We also see attractive risk-adjusted opportunities in short-term credit, which offers some defensive characteristics, and potential risk mitigation from spread widening as well. 

If we look beyond investment-grade corporate credit, things like hybrids and infrastructure debt or even private credit, also stand out for their diversification benefits and relatively better compensation from a risk/return perspective. 

You have to be cautious on some of these more illiquid parts of the credit market, and have to manage your exposures accordingly. But we do think there is value there if we think about diversification and potential for higher yields. And so we are positive on those areas of the credit market as well.

* * *

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.