Markets have entered September with renewed volatility as investors weigh higher energy prices, inflation concerns and uncertainty around the direction of interest rates. Longer-term bond yields have moved higher globally, while equity markets have taken a bit of a breather after a strong run. In the U.S., the 10-year Treasury yield is now around 4.8% (vs a year to date low of 4% in March), while in Canada the 10-year yield is approximately 3.8% (vs a year to date low of 3.2% in March).

While rising yields can create some short-term volatility for both stocks and bonds, there is an important positive for diversified portfolios: fixed income is once again providing meaningful income. Higher starting yields mean investors are being better compensated for owning bonds and have more income available to help offset potential price fluctuations.

A few key points for portfolios:

• Higher yields provide more cushion. The income generated by bonds can help absorb some price volatility, improving their ability to provide stability within a balanced portfolio.
• Diversification remains especially valuable. Equities have delivered strong gains over the past year, but higher interest rates, oil prices and inflation uncertainty could lead to periods of volatility. A fixed-income allocation gives portfolios another source of return rather than relying solely on equity markets. 

There will always be uncertainty around interest rates, inflation, and geopolitics, but today’s higher yields have materially improved the role fixed income can play in a portfolio. Investors are now being paid meaningful income to own high-quality bonds, creating a larger cushion against volatility and helping restore the stability and diversification we expect fixed income to provide. For long-term investors, we believe that makes a well-balanced portfolio better positioned to navigate whatever comes next. 

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