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A Canadian dollar.Jonathan Hayward/The Canadian Press

These are interesting times for fixed income investing. U.S. bond yields have been rising since last spring, threatening to end a 30-year bull market in bonds. At the same time, the Canadian dollar is sinking, high-yield debt has been on a tear and emerging markets appear vulnerable to an end to U.S. monetary stimulus.

How do you navigate through these conditions? Daniel Janis and Thomas Goggins have some thoughts: They co-manage the Manulife Strategic Income Fund from their home base in Boston, travelling the world in search of opportunities and managing four key risks – credit risk, currency risk, duration risk and liquidity risk.

"Equity people tend to be happier," said Mr. Goggins. "They pick something and it can go up ten-fold. What's the best thing that happens when we buy credit? We get our money back. We're always playing defence – what could go wrong instead of what could go right."

Right now, that means underweighting the Canadian dollar and moving out of the junkier junk-bonds and into safer fixed income. But they also see opportunity, and dismissing the immediate threat of a Chinese financial implosion is one of them. Here are some of the details of our conversion last week, edited for length.

High-yield bonds
Goggins: After four years and a pretty good run in high yield, we've been harvesting those gains. So we've sold our triple-C names and used the proceeds for floating-rate bank loans. Think about that: You're going from the most volatile area of fixed income, into the most senior in the credit stack. But if rates go up, you get paid more, so we like that trade.

Now we're in the process of changing the sectors we're in. The sectors that have really benefited from the rebound in credit have been the deep cyclicals. But we're getting more conservative, and we're going into less cyclical sectors like health-care and pipelines.

Canadian dollar
Janis: In our Canadian product, we're nearly 100 per cent hedged away from the Canadian dollar. Two years ago, we were long Canada. We just go where the fundamentals tell us to go: Even though the Bank of Canada raised growth forecasts, the inflation expectations are lower – so it probably leads to easing monetary conditions, which is stable or lower interest rates and a weaker currency. We're going to remain with an underweight bias on the Canadian dollar.

A weaker currency, if done in a gradual fashion, is fine. I think the key thing for Canada in the longer term – where we look at things five years out – it's the best G7 country going. The consumer is tapped out on housing, some of the fundamentals on trade are negative; it's just a process of how it works.

China: Are things okay there or about to implode?
Janis: I don't think we're going to have a problem this year. They're going to grow somewhere in that 7 per cent range. But are there problems? Absolutely. It's a command economy that is shifting from being this directed export-led economy to a consumer-led economy. There are issues there. There are also investments levered to the U.S. low-interest rate policy. Down the road, that could hurt. Could that be pervasive and have a knock-on domino effect? I don't think it's this year's problem. Going forward the question is: Can they continue in this command economy style to keep the economy rolling? I don't think anybody knows.

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