Why government bonds aren’t safe

These days, the trade-off for low default risk appears to be a really low reward — or, if you’re in Europe or Japan, a negative reward.

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So, investors searching for safe yield should instead turn to high-quality corporate bonds, suggests Luc de la Durantaye, first vice-president of Global Asset Allocation and Currency Management at CIBC Asset Management, and manager of the Renaissance Optimal Inflation Opportunities Portfolio.

“Given monetary policies have been pushed to their limit, that has brought government bonds to very low levels,” and we’re facing negative interest rates in Europe and Japan, he adds. “That has raised the question of whether government bonds are safe.”

Read: Negative yields can turn your world upside down

In particular, countries with negative interest rates are “no longer safe haven[s] in the sense that you’re guaranteed to have a loss in holding certain government bonds around the world; certainly developed government bonds.”

Further, de la Durantaye says there’s a chance that some countries may backtrack on setting negative rates. And, if that does occur in the Eurozone and Japan and if their rates become positive again, “in some areas you would have losses holding some government bonds.”

Read: Has the municipal bond bull left the ring?

Domestic environment

In North America, rates are likely to remain low, says de la Durantaye. “Within that context, high-quality corporate bonds can still offer decent expected returns.”

But, he adds, “I think we need to look outside the box in terms of alternative fixed income investments.” That means investors should turn to high-yield, and to emerging market debt and global currencies, “which actually still offer attractive rates of return today.”

Read: Help investors move away from Canada Savings Bonds

As well, investors should avoid rate-sensitive sectors, says de la Durantaye. “If we see that government bonds have declined and are likely to [go] back up, we have said [people should] be more careful about interest-sensitive sectors.” That means balancing your portfolio toward more value sectors going forward, he adds.

Read:

Avoid interest rate-sensitive trades and Why to leave rate-sensitive sectors now

Value stocks beating growth stocks

How to maximize bond returns

Don’t underestimate high yield

Can dividend stocks replace bonds?