How fixed-income instruments can help investors build portfolio stability

Fixed-income instruments are a core part of wealth management. These products offer steady income over a set period. Most are issued by governments or corporations to raise capital. In return, investors receive regular payments and the return of principal at maturity. 

For financial advisors, fixed-income investments can help reduce volatility and provide stability during market downturns. They are also essential for clients who need predictable cash flow or want to preserve capital. 

In this article, Wealth Professional Canada will explain how fixed-income instruments work. We will also outline the main types used in the country as well as how financial advisors can apply them to client portfolios. 

Is fixed income a financial instrument? 

Yes, fixed income is a category of financial instruments. These instruments are designed to provide regular income to the investor. They are called "fixed income" because they pay a set interest amount over a specific period of time. At the end of that period, also known as maturity, the investor usually receives back the original amount invested. 

Fixed-income instruments are commonly issued by governments, banks, and corporations. They include products such as bonds, GICs, and Treasury bills. These are used to raise capital while offering investors predictable returns. 

What makes fixed-income instruments unique is the structure of the payments. Investors know how much they will receive and when they will receive it. This predictability makes fixed-income securities important for clients who need stability, such as retirees or conservative investors. 

Fixed income is considered safer than many other types of financial instruments. It may not grow as quickly as equity investments, but it helps reduce portfolio risk. That is why many financial advisors use fixed income as a foundation for long-term client portfolios. 

In short, fixed income is not just a financial strategy. It is a category of actual financial products that serve a key role in investment planning. 

What are fixed-income instruments? 

Fixed-income instruments are investment products that offer regular interest payments. These payments are made at a fixed rate or based on a known formula. At the end of the term, investors typically receive their original investment back. This is known as the principal. 

The term “fixed income” refers to the fact that the income stream is either fixed or relatively predictable. Unlike stocks, which can rise or fall in value with no guaranteed return, fixed-income instruments provide a contractual obligation to pay. This makes them attractive to conservative investors, retirees, and clients who want a balance of equity holdings. 

Common features of fixed-income instruments include: 

• a maturity date 
• a fixed or floating interest rate 
• a face value or par value 
• a credit rating to measure default risk 

Most instruments are issued in the form of bonds. These can be bought individually or through funds and exchange-traded products. Some are short-term. Others may run for decades. 

Types of fixed-income instruments in Canada 

Canadian financial advisors have access to a range of fixed-income products. Each one comes with its own set of benefits and risks. Here are some of the most commonly used types: 

Government bonds 

Government bonds are issued by federal, provincial, or municipal governments. They are considered low-risk and are often used as the base of a fixed-income portfolio. The most well-known issuer in the country is the Government of Canada. 

Examples include: 

• Government of Canada bonds 
• Canada savings bonds (now discontinued for new purchases) 
• provincial bonds like Ontario Savings Bonds or Quebec bonds 
• municipal debentures issued by cities 

These bonds pay regular interest and are backed by the credit of the issuer. They are usually liquid and easy to trade. 

Corporate bonds 

Corporate bonds are issued by companies to raise funds. They offer higher yields than government bonds but carry more credit risk. These can range from investment-grade to high yield. 

Advisors may consider corporate bonds for clients seeking higher income with manageable risk. The credit quality, term to maturity, and issuer sector are all important factors. 

Guaranteed investment certificates (GICs) 

GICs are popular in Canada because they offer principal protection and a guaranteed return. They are issued by banks and credit unions. While they lack market liquidity, they are simple and easy for clients to understand. 

Types of GICs include: 

• redeemable GICs 
• non-redeemable GICs 
• market-linked GICs 
• laddered GIC strategies 

GICs are typically covered by deposit insurance up to specific limits through CDIC or provincial programs. 

Find out how GICs compare to mutual funds in this article. 

Preferred shares 

Preferred shares are technically equity but behave like fixed-income products. They offer fixed dividends and have a priority claim over common shares. Rate-reset preferred shares are commonly used for income strategies. 

Preferred shares can be sensitive to interest rates and market demand. They are often used in taxable accounts because of the dividend tax credit. 

Money market instruments 

These are short-term debt products that mature in less than one year. They include treasury bills, bankers’ acceptances, and commercial papers. They are low-risk and provide liquidity but offer lower yields. 

Money market funds are often used to hold cash equivalents in client accounts. 

Strip bonds 

Strip bonds are created by separating the principal and interest components of a standard bond. Each strip is sold individually and matures at face value without paying regular interest. 

These are sold at a discount and can be tax-inefficient in non-registered accounts, but they offer precision for matching future liabilities. 

Benefits of fixed-income instruments in client portfolios 

Fixed-income investments provide a range of benefits that support long-term wealth planning. These include income stability, capital preservation, and diversification. 

Here are some advantages: 

• income stability: clients receive regular payments, which support spending needs and help with planning 

• lower volatility: fixed-income securities tend to move less than equities, offering a buffer during market corrections 

• capital preservation: high-quality fixed-income instruments, such as federal bonds or insured GICs, protect the original investment 

• diversification: fixed income provides balance in portfolios that also include equities or alternative assets 

• customization: products vary by term, credit quality, and structure, allowing advisors to match client risk tolerance and time horizon 

Risks to consider with fixed-income investing 

While fixed-income products are generally safer than equities, they are not risk-free. Advisors should be aware of the following: 

• interest rate: when rates rise, the value of existing bonds may fall 
• credit: some issuers may default or face financial stress, especially in corporate bonds 
• liquidity not all fixed-income products are easy to trade, particularly during volatile markets 
• inflation: fixed payments may lose purchasing power if inflation rises 
• call: some bonds can be redeemed early by the issuer, which may affect expected returns 

Risk can be managed through diversification, duration control, and active monitoring of credit conditions. 

How to build fixed-income exposure in client portfolios 

There are multiple ways to add fixed-income exposure depending on the client’s goals, tax situation, and investment preferences. Some options include: 

• buying individual bonds or GICs for laddering or matching future liabilities 
• using fixed-income mutual funds that provide professional management and diversification 
• using bond ETFs that offer low-cost access to specific sectors or duration targets 
• combining with other asset classes to build balanced portfolios with a fixed-income core 

Advisors should also consider currency exposure, especially for clients investing in global bond markets. Currency-hedged products may be good for reducing volatility. 

Fixed-income instruments in rising and falling rate environments 

Interest rate cycles have a direct effect on fixed-income returns. When rates rise, bond prices usually fall. When rates fall, bond prices rise. Understanding this dynamic helps advisors make better tactical decisions. 

In a rising rate environment, strategies may include: 

• reducing duration by focusing on short-term bonds 
• using floating-rate notes that adjust with interest rates 
• laddering GICs to manage reinvestment opportunities 

In a falling rate environment, advisors may look to: 

• extend duration to lock in higher yields 
• use bond funds that benefit from capital gains on existing holdings 
• consider preferred shares that reset at lower future rates 

The Bank of Canada’s rate outlook is a key input for these strategies. 

Tax considerations for clients 

Fixed-income income is taxed differently than other forms of investment income in Canada. Interest income is fully taxable at the client’s marginal rate. This makes it less efficient in non-registered accounts. 

Advisors can consider the following to improve tax efficiency: 

• placing fixed-income products in registered accounts like retirement savings plan (RRSP) and tax-free savings account (TFSA) 

• using preferred shares for tax-advantaged dividend income in taxable accounts 

• matching income to cash flow needs in retirement to avoid over-contributions or forced withdrawals 

Tax rules also apply to accrued interest, market discounts, and capital gains on bond trades. These should be reviewed with a tax advisor. 

What is the difference between fixed income instruments and equity instruments? 

The main difference between fixed-income instruments and equity instruments is how they generate returns and what kind of ownership they represent. 

Fixed-income instruments pay regular interest and return the principal at maturity. Investors do not own a part of the issuing company. Instead, they lend money to the issuer in exchange for a set payment schedule. 

Equity instruments, on the other hand, represent ownership in a company. These include common shares. Investors in equities can benefit from rising stock prices and dividends, but they also take on more risk. There are no guaranteed returns with equities, and the value can change quickly based on market conditions. 

Here is a simple comparison: 

• fixed-income investors are lenders 
• equity investors are owners 
• fixed income provides stable income 
• equity offers growth potential with higher risk 
• fixed income has a maturity date 
• equity has no maturity and can be held indefinitely 

Each type plays a different role in a portfolio. Fixed income helps with stability and cash flow. Equity provides growth over time. A balanced portfolio usually includes both, based on the client's goals and risk tolerance. 

Understanding the difference helps advisors build better strategies for long-term success. Curious to know how the experts would do this? Get in touch with the top financial advisors for their take on things. See the full list of 5-Star financial advisors in Canada. 

Recent trends in fixed-income investing in Canada 

Recent years have seen several changes in how Canadian advisors use fixed income. These trends include: 

• increased use of ETFs for cost efficiency and liquidity 
• growing demand for ESG-labelled fixed-income products 
• more focus on active bond strategies during periods of rate volatility 
• rising client interest in GIC ladders as rates increased 

Technology has also made it easier to screen, compare, and buy fixed-income instruments. Some platforms now offer bond order desks with live quotes for advisors. 

How fixed-income instruments fit in your range of services as a financial advisor 

Fixed-income instruments are a core part of the services financial advisors offer. These include individual bonds, annuities, and government-issued debt. Financial advisors use them to provide stability and generate income for clients. 

Many clients rely on these instruments to meet retirement goals or to preserve wealth during uncertain market conditions. By understanding how each product works in different economic environments, financial advisors can build strategies that match client needs. 

Offering fixed-income instruments can help your clients create well-structured portfolios. Plus, it reinforces your role in guiding clients toward achieving their long-term financial objectives. 

We have an entire section on fixed income. Be sure to check and bookmark it for more information.