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With Government of Canada bonds yielding 0.6 per cent, investors with balanced portfolios are carrying a fair amount of dead weight.

Things could get worse, though.

Some projections from investment dealer Richardson GMP suggest the years ahead could be quite the challenge for balanced or bond-heavy portfolios. Bond yields are expected to rise in the next 12 months, and that means falling bond prices. Combine projected yields and price declines and you get a total return that could easily be negative.

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Could the current investing outlook be any tougher? Stocks are up a ton since March, but they’ve shown signs of fatigue in early September. Bonds have done well, too, but now we have this dismal outlook for fixed income. Let’s dig into the numbers before looking at workarounds.

Richardson GMP said the consensus forecast for 10-year Canadian bond returns over the next 12 months is minus 2.3 per cent, with a best case of 0.5 per cent and a worst case of almost minus 5 per cent.

The rise in bond yields that triggers these sad return projections is modest. The consensus 12-month forecast projects a 10-year bond yield of 0.95 per cent. By then, inflation could easily be back to that level or higher.

Richardson GMP says rising yields will weigh on bond prices in the near term and, as a result, it recommends that investors take two steps. One is to underweight bonds as a portfolio asset and the other is to focus on shorter term bonds, which typically means they mature in five years or less.

Another step would be to emphasize investment-grade corporate bonds over government bonds. Corporate bonds offer a better yield, but not enough to provide much hope for positive returns. Where to find positive fixed income returns in the near to medium term? Richardson GMP suggests high yield bonds, preferred shares and emerging market bonds.

In choosing from among these options, consider your priorities for bonds.

Are you holding them to augment investment income, or to diversify your portfolio in a way that blunts the worst of a stock market decline? If you’re hedging against a stock market correction, government bonds actually do have some value. An alternative would be guaranteed investment certificates, where a five-year term could still get you 2 per cent from a variety of issuers.

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