‘Regime change for investors’: Rising bond yields make fixed income attractive again

After a long period of poor returns, investors are once again seeing value in the fixed income market. 

Bond yields have been on the rise over recent months because of worries including high inflation and government debt levels. The 10-year U.S. Treasury was trading above five per cent this week, while the 10-year Canada bond was nearly four per cent. 

Higher bond yields and rising interest rates mean that retail investors with equity-heavy portfolios may want to reconsider their exposure to fixed income.  

“We are back to something that is normal,” Sébastien Mc Mahon, chief economist at iA Financial Group, said of interest rates in Canada and the U.S.

“It is in line with fundamentals, but the issue is that we haven’t seen those rates for 20 to 25 years. So it’s a regime change for investors.” 

In conversations with his client base — mostly financial advisers — he said he still sees some reluctance to invest in bonds because “they’ve been burned by fixed income for so long.” During the 2010s, Mc Mahon said there was little appetite among investors for fixed income products because of their menial returns.    

Mc Mahon said the changes in the bond market mean a traditional 60/40 portfolio construction — 60 per cent equities and 40 per cent fixed income — is more attractive again after falling out of favour when yields were lower.

When governments or large companies need money, they issue bonds to investors, with a promise to repay that money along with a certain amount of interest.

If bonds’ perceived attractiveness falls among investors due to factors like inflationary pressure, buyers can get them for cheaper, but that bond will still pay the same interest rate. This means the new buyer would get a larger return via a higher yield. 

Alex Lee, senior fixed income client portfolio manager at Vanguard Canada, said he thinks bond investors are in a better position now given the number of rate hikes priced in the market today. He said Vanguard expects the Bank of Canada to raise rates once by the end of this year and again by the end of next year. For the U.S. Federal Reserve, he said Vanguard expects one additional hike by the end of the year.

“We’re not going back to that zero-rate environment. We think interest rates have normalized to a point where … now fixed income actually provides income to investors,” said Lee.

That contrasts with a low yield environment, where the return may not outpace inflation.

“We continue to see growth on the ETF side for fixed income,” Lee said. “If we were to look at ETF flows year-to-date, we’re getting close to surpassing last year’s flow. We’ve seen flows pick up overall since 2022,” Lee said.

Hadiza Djataou, vice-president and portfolio manager of global bonds at Mackenzie Investments, said that changes in the bond market have made fixed income products “extremely attractive.”  

“If you were to buy just a simple credit ETF in the U.S. or even in Canada, you’re likely going to collect more than the dividend yield you would get on your stocks,” she said.   

“And the level of valuation is also very different. I think equities are expensive; I don’t think bonds are expensive. They’re actually close to what we would call oversold level, and that creates a better outlook for them to perform in the near future compared to equities.” 

She said inflationary pressures from the Middle East risk environment have also been driving yields higher and noted that certain fixed-income products can offer protection against rising inflation.

She also said she sees value in corporate bonds.

“Especially in Canada, when you think about corporates, we have high-quality banks, utilities regulated businesses that you can purchase via credit funds that not only capture the higher yields but also give you that extra compensation coming from owning a corporate bond versus a government bond,” Djataou said.

This report by The Canadian Press was first published Oct. 15, 2026.