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From President Trump to tariffs, rate cuts, and rising yields, the past year has been challenging for fixed income. And that’s before you look at returns. “We are in a highly unusual time,” says Dagmara Fijalkowski, lead manager of RBC Bond Fund F. “The probability of something going wrong when you have so many different policy pieces up in the air—and it’s not just depending on US monetary policy, but also how other countries will respond—contributes to this overwhelming uncertainty.”
With the first 100 days of President Trump’s term behind us, can investors rest easy? “I doubt it,” says Fijalkowski, who is also senior vice president and head of global fixed income and currencies at Toronto-based RBC Global Asset Management. “Certainly, he is responsible for conflicting headlines which unnerve investors—not just capital market investors, but also corporations. It’s very hard to make decisions when the framework is uncertain. This all adds to uncertainty and lower risk-taking. We can probably assume more volatile headlines to come.”
‘Unnerving’ Times for Fixed-Income Investors
The RBC Bond Fund, which has $26.7 billion in assets, has borne the brunt of that uncertainty. Since the start of the year, which has seen the inauguration of Trump and the announcement of his trade tariffs, the F class of the shares have risen 0.63%, against an average return of 0.66% for the wider fixed-income category. Go back to the 12 months ended May 5, and the Gold-rated fund returned 7.16%, beating the Canadian Fixed Income category’s return of 6.78%.
“The bond market last year was quite positive for investors until around September. The second half was much more disappointing,” explains Fijalkowski, who has a team of over 40 portfolio managers and analysts located in Toronto, Vancouver, and London. “By October, the Federal Reserve started cutting rates, and with President Trump’s election, growth expectations shot up, lifting yields higher. In that environment risky assets became overpriced and opportunities were few and far between.”
I response, the RBC GAM fixed-income team reined in risk-taking in the fourth quarter and entered 2025 with quite a neutral stance, explains Fijalkowski, a 25-year industry veteran. “That’s why our one-year returns are good both in absolute and relative terms. But it’s also why the most recent shorter term readings are fairly flat.”
Hunting for Opportunities for Investors
While the current high-volatility environment is unnerving some fixed-income investors, Fijalkowski argues that it also creates opportunities for the future. “Our investment horizon is not just one month or one quarter. We look for opportunities to capitalize on markets over 18-36 months.”
To handle all the uncertainty, the RBC team uses various scenarios to develop the fund’s strategy. And they are working on the probability of there being four or five interest rate cuts in the next 12 months. “That probability is lower than the market is pricing in. But it’s only one of our scenarios, and it’s not even above 50% probability,” Fijalkowski says.
Fijalkowski notes that fixed-income markets are pricing in further cuts by the Federal Reserve because of anticipated slower GDP growth in 2025 and inflation falling toward its target of 2%. “The Fed rate is now in a range of 4.25%-4.50%. That’s much higher than ‘neutral’ because the Fed considers 3% a neutral interest rate. The market has merely been pricing in a future return toward neutral. More rate cuts may have to be priced in if a recession becomes a dominant scenario.”
Fijalkowski argues that since the uncertainty is unlikely to end, “there is actually between 35% and 40% probability of a recession. In that case, the Fed would have to cut rates even more and move into so-called ‘easy’ monetary policy territory,” she says. Conversely, there is only a 15%-20% scenario of no rate cuts at all. This scenario is based on the expectation that inflation remains where it is and the economy continues to hum along—which Fijalkowski says could disappoint the bond market.
Foreign Investors Flock to Canadian Bonds
Since the start of the year, the Euro’s appreciation against the US dollar reflects the closing of the gap between US growth potential, which is slowing due to tariffs, and European growth potential, which is rising due to the opening of fiscal spending capacity. The US dollar has already lost about 6%-7% against the Euro on a trade-weighted basis, notes Fijalkowski, who expects this trend to continue for the next few years.
Meanwhile, the Canadian dollar has weakened in expectation of significant trade tariffs targeting Canada and Mexico early in the year. However, since the tariff threat has been diluted, the loony has started to strengthen. “The pessimism about Canada was actually good for the fixed income market, since it drove bond prices up,” observes Fijalkowski. “The spread between Canadian and US Treasury bonds widened to all-time highs. Canadian Treasury bonds traded at 150 basis points less than comparable US Treasury bonds in early February.”
Analysis finds huge foreign inflows into Canadian bonds in January. “Since then, Canadian bonds have been giving back some of their outperformance,” says Fijalkowski, who adds that many foreign buyers are still focusing on Canada as a way to diversify away from US treasuries.
From a strategic viewpoint, Fijalkowski is holding 53% in government bonds (including 2% cash). That’s in contrast to the 75.5% weighting in the benchmark FTSE Canada Universe Bond Index. There is also 47.0% in investment-grade corporate bonds, including 2.0% non-investment-grade debt, versus 24.5% in the benchmark.
Fijalkowski points out that the non-investment-grade allocation is the lowest in the fund’s history. “Early in the year, the market was pricing in a lot of optimism about US growth and positive results from Trump’s policies such as tax cuts and deregulation. We were comfortable holding our extremely-low allocation on non-investment grade bonds.”
How is RBC Bond F positioned?
“We are quite defensive right now, and the path forward depends on market opportunities,” says Fijalkowski. “Wider spreads would mean better compensation and it would lead us to increase our corporate weighting, and our non-investment grade corporate weighting, too. But if we have tighter spreads, and lower rewards for taking on risks, the next step would mean reducing our investment-grade risk.
“The next step depends on which one of the two key scenarios I outlined materializes, or gains in probability,” says Fijalkowski. “Our positioning right now has very low risk. Our overweight is mostly in Canadian investment-grade corporate bonds, which are under five years in maturity. We are very comfortable holding this allocation because of the valuations of these bonds, but also because of our credit team’s ability to analyze the credit risks. We hold very little in the non-investment grade bonds.
“We have high confidence in what we hold and are well positioned to take advantage of the volatility in the markets.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
