Government bonds provided reliable ballast earlier this year when equity markets tanked in response to the Covid-19 pandemic. Government of Canada seven- to 10-year bonds returned 9.5% in the first three quarters of the year, and long-duration (20+ years) Government of Canada bonds returned almost 20%, according to a report from FTSE Russell.
Seven- to 10-year U.S. Treasuries returned 11.5% as of Sept. 30, while long Treasuries returned 20.8% (in USD).
“It’s going to be really hard to extrapolate that going beyond this,” Taylor said, since he doesn’t see North America moving to negative rates anytime soon.
Phil Mesman, head of fixed income with Picton Mahoney Asset Management in Toronto, said strategies need to shift now, even though the 40% fixed income part of portfolios served investors well this year.
Replicating the benefit from government bonds this year would require a -10 basis point U.S. Treasury yield, he said.
“All of the backward numbers look great in fixed income,” Mesman said. “The typical advisor portfolio looks amazing but, at current yields and current duration, it makes sense to be a little more creative.”
Taylor said investors can look to investment-grade corporate bonds to find yield through active management. Beyond that, he said investors will have to consider alternative strategies such as options writing and private debt, as well as hard assets such as real estate, infrastructure and precious metals.
“We think there’s going to be a rework of the traditional 60-40 portfolio,” he said.
Mesman said he’s focused on long and short opportunities in developed-market BBB- to B-grade bonds.
The Federal Reserve’s willingness to purchase corporate bonds has made the market more expensive and masked credit risk, he said. This has created opportunities on the short side to both protect the portfolio and provide alpha in cases “where the real economy’s impact on financial assets has yet to be felt,” he said.
Jonathan Hausman, managing director and head of global strategic relationships with the Ontario Teachers’ Pension Plan, warned about the risks of wading into high-yield credit.
Speaking on a webinar earlier this month, FTSE Russell director of fixed income research Robin Marshall also expressed concerns about a “high-yield value trap.” Canadian credit spreads were wider during the economic downturn in 2015-16 than they are now, he said — a “conundrum” given the depth of recession investors are now facing.
High-yield valuations have moved to “demanding” levels relative to current default risks, he said.
Hausman also pointed to strategies such as infrastructure and real assets to provide protection as well as some return on the fixed income side, which is hard to come by.
“That requires some creativity,” he said, “but not much creativity because that’s how folks get into trouble.”
A report from Richardson GMP this month also warned against relying on government bonds and made the case for long-short credit strategies. It pointed to Japanese and German bonds, which started the year with lower yields and “provided nearly no ballast at all” in March.
“With the U.S. and Canada yields now at similarly low starting points, it is unlikely that they can provide anywhere near the same historical hedging properties as in previous downturns,” the report said.
Rather than diving into lower-quality assets to find yield, the report recommended long-short strategies for investment-grade credit.
Mesman also warned about duration risk on government bonds.
“I think the risk of government bond yields going higher, particularly in the long end of the market — longer-dated government bond yields — that’s something that’s underappreciated,” he said.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
