Fixed income strategies faces new test as tariffs and uncertainty continues

In a market increasingly defined by contradiction - cooling growth but sticky inflation, elevated rates but looming recession risk - fixed income strategy is shifting from yield chasing to risk calibration.  

“Unlike the post-2008 period, we’re now in a world where fixed income offers attractive levels of income,” says Hafiz Noordin, Vice President & Director, Active Fixed Income Portfolio Management at TDAM. “And income stability will be increasingly important in managing through uncertainty.” 

A lot has changed since the U.S. government announcement its "Liberation Day" tariffs, and while recent activity may feel like a sharp jolt, this volatility has been building for months. Much of the shift began in late January, around the time of President Trump's inauguration, when investor sentiment started to reflect a more uncertain macro and geopolitical backdrop. As volatility picked up, investors did what they often do in times of stress - sought safety. 

That risk-off behavior has been evident in equity markets, where capital has rotated out of cyclical sectors like energy and semiconductors and into more defensive names such as utilities - buoyed not just by perceived stability, but also by relatively resilient earnings. Bond yields have not escaped the volatility, where the old playbook of 'flight to quality' during times of uncertainty does not always hold true today. 

Trade policy clouds the outlook 

The reintroduction of tariffs, especially those targeting China, has rattled markets and introduced a new layer of complexity for investors. “Tariffs are hitting trade flows, pressuring corporate margins, and raising consumer prices,” Noordin says. “But more broadly, they’ve become a source of persistent uncertainty, undermining business and household confidence.” 

It’s not just the immediate economic impact that matters. The larger question is whether tariffs represent a permanent shift in U.S. trade policy or simply a short-term negotiating tool. “The longer they remain in place, the more entrenched the uncertainty becomes—and that’s what’s weighing on investment and spending plans,” Noordin explains. 

Policymakers have taken note. In April, the Bank of Canada revised its monetary policy outlook, moving from a singular forecast to two distinct scenarios: one involving persistent tariffs and a possible recession, and another in which policy uncertainty alone slows growth. “That signals just how little clarity exists around the forward path,” Noordin says. 

In the meantime, fixed income has resumed its traditional role. Market-based inflation expectations, such as breakeven rates, have remained consistent with the Federal Reserve’s 2% inflation target, reinforcing the view that weakening demand may soon overshadow residual price pressures. 

Caution on rates, emphasis on flexibility 

Given the crosscurrents, TDAM isn’t betting heavily on where interest rates are headed. “Government bond yields are being pulled in two directions. Growth concerns would typically drive them down, but inflation risks and fiscal dynamics suggest otherwise,” Noordin says. “It’s a noisy signal, and there’s no clean direction.” 

Rather than chase yield curve predictions, Noordin and his team are prioritizing portfolio stability and liquidity. Their approach emphasizes strategic allocations to high-quality investment-grade corporate bonds, alongside a meaningful allocation to federal government bonds and cash-like assets when volatility is elevated. “That dry powder gives us the ability to act quickly on opportunities when credit spreads widen or markets overshoot,” he says. 

For institutional clients, particularly pension plans, the shift is also about protecting gains. Most plans entered the year in surplus, thanks to strong equity returns and higher yields in recent years. Noordin says, “The focus now is on preserving funded status, while still looking for growth from surplus assets.” 

That means reevaluating interest rate hedge ratios and reassessing the income durability of fixed income portfolios. “Enhancing yield without compromising credit quality is key,” he notes. “Your starting yield is one of the best predictors of long-term returns in bonds.” 

Credit Markets Hold Up—But Not Without Risk 

Despite considerable stress in equity markets, credit spreads have remained contained with U.S. corporate bond spreads remaining below long-term average levels. “Markets are pricing in a slowdown, not a full-blown recession,” Noordin says. 

TDAM continues to favour investment grade corporate bonds, both in Canada and globally, with a focus on sectors like pipelines, utilities, and telecoms that offer recurring revenue and stable fundamentals. “Business model resilience is critical when macro conditions are this fluid,” he adds. 

The firm is also finding tactical opportunities in sectors where pricing has detached from fundamentals. Canadian REITs, for instance, have seen spreads widen on fears of downgrades to high yield status, but Noordin’s team believes select names still have investment grade characteristics. “That’s where bottom-up credit research becomes essential,” he says. 

At the same time, the team remains cautious on broad high yield exposure. “Current spreads reflect a mild deceleration—not a downturn,” Noordin warns. “If a recession does take hold, spreads could widen significantly—there’s still room for repricing.” 

Instead, TDAM has increasingly turned to private credit, specifically commercial mortgages and other real asset-backed loans. “They offer high-yield-like returns, but with better collateral and less volatility,” Noordin says. “You trade off liquidity for income stability, and for many clients, that’s a worthwhile exchange.” 

A broader Role for ALM in Volatile Conditions 

Behind TDAM’s portfolio strategy is a closely integrated asset-liability management (ALM) function. With proprietary tools and deep actuarial experience, the team works alongside portfolio managers to align fixed income exposure with liability profiles in real time. 

“It’s not just about matching duration,” Noordin says. “It’s about constructing portfolios that are resilient under stress and ensuring both assets and liabilities are understood in detail.” 

Scale also plays a role. TDAM’s size provides access to issuers, favourable pricing, and regular dialogue with management teams—advantages that support both public and private credit implementation. “That integration—credit research, ALM, and portfolio management—is what allows us to build conviction when markets are volatile,” he says. 

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^{TD Global Investment Solutions represents TD Asset Management Inc. (“TDAM”) and Epoch Investment Partners, Inc. (“TD Epoch”). TDAM and TD Epoch are affiliates and wholly-owned subsidiaries of The Toronto-Dominion Bank.}