The Source: Levante Mady, managing director, derivatives, at Union Securities.
The Idea: Buy long-term Canada and/or U.S. government bonds.
This may seem like sheer folly given the hair-raising ups and downs in the long-term bond market over time. Bond prices could come crashing down if the economy picks up, interest rates rise and inflation revives.
That isn’t likely to happen soon, Mr. Mady argues.
“I don’t think that it’s an issue at all, at least not at this point,” he says of a dreaded rise in inflation.
Investors who are content to keep their money in Canada may prefer Government of Canada bonds. “They’re probably a little better quality.”
Those who believe, like Mr. Mady, that the Canadian dollar is overvalued may want to tuck into some U.S. Treasuries.
“If you bought U.S. bonds, even if they don’t do well, you might make a little extra money on the exchange rate.”
As for inflation, Mr. Mady says he “looks at the U.S. as the bus driver.”
“If the U.S. is going to be stuck in the mud, which it is, Canada is not going to be growing at a great pace.”
Indeed, with high unemployment and so much slack, the North American economy would be contracting if it was not for government spending.
So, investors have three choices: make little or nothing in short-term deposits, lose money in the stock market or earn 3.75-per-cent to 4.25-per-cent interest on long-term Canada and U.S. bonds – and maybe more.
One important point: Mr. Mady is not recommending buying 20 or 30-year bonds and holding them to maturity – or even necessarily to year end.
“My time horizon is probably the next couple of weeks, maybe the next couple of months.”
Still, given how shaky stock markets are, “it’s a good idea to have a fairly substantial portion of your portfolio in safe assets like government bonds.”
The Payoff: Interest income of roughly 4 per cent a year as well as a potential capital gain of perhaps 3 per cent to 4 per cent if interest rates soften, for a total return of 6.75 per cent to 8.25 per cent. Any exchange-rate gain on U.S. bonds would be gravy.
The Big Risk: If he’s wrong about the economy and inflation picks up, long bond prices will drop and investors who sell will lose money.
Why Listen to Levante Mady: Mr. Mady has gained quite a following over the past eight years for the weekly BondWorks letter he writes for Institutional Advisers, in which he’s made some timely calls.
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