Performance of Credit in a Rising Rate Environment

This technical report examines the performance of credit strategies within fixed income investments during periods of rising interest rates. It outlines the historical context of Canadian interest rates, noting a significant rise from 1945 to 1981, followed by a decline. The report details how rising interest rates can impact fixed income returns, emphasizing that initial negative effects may be offset by higher future yields. The analysis includes scenarios demonstrating how bond prices and coupon returns interact, illustrating that total returns can remain positive despite capital losses. Furthermore, the report presents historical performance data of various credit strategies during rising rate periods, indicating that credit strategies like provincial and corporate bonds tend to outperform federal bonds. The findings suggest that credit strategies can mitigate the adverse effects of rising rates, especially when incorporated appropriately into a fixed income portfolio. Overall, the report provides a detailed examination of the dynamics between interest rates, bond prices, and credit strategies.