As interest rates return to pre-pandemic levels, fixed income is returning to its role as an equities hedge, according to a webinar on Wednesday hosted by AllianceBernstein Canada Inc.

“As we see rates rise back to where they were at the end of 2019, there’s gas in the tank for fixed income to play that role again,” said Mike Rosborough, a global multi-sector portfolio manager at AllianceBernstein. “It certainly got difficult when 10-year rates in the U.S. got down to 50 basis points during the worst of the pandemic.

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He added that institutional investors will also have to embrace more diverse and global portfolios, “in terms of having a broader place to reach for yield and where liquidity is developing more than it was before, in places like China.”

Rosborough said over the next two to three years, the divergence between nominal yields and nominal growth in the Canadian and U.S. markets is on track to rival or surpass levels last seen in the 1970s, pointing towards looming inflation. “There’s an eight-per cent differential between where nominal growth is going to be in the U.S. next year and where 10-year yields are right now….To me, that’s a high-inflationary setting.”

And as credit spreads return to pre-pandemic levels, Rosborough said there’s fixed-income opportunities to be had for institutional investors, particularly in China. “I’m excited about China as it broadens fixed income opportunities. It used to be a one-way bet in years past, but as [the country’s] current account deficit has come from surplus to parity, their interaction with the financial system increases as does their desire for foreign investment.”

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