A job board at Youth Employment Services in Toronto.KEVIN VAN PAASSEN/The Globe and Mail
Look to the jobs market to see if one of the biggest investing surprises of the year has any juice left.
This was supposed to a year of slow but steady improvement in the economy, which in turn would add some impetus for interest rates to rise. Instead, the economy has disappointed and bond yields have fallen. The long-term bonds that were thought early this year to be highly risky have turned out to be almost spectacularly good.
As of July 22, exchange-traded funds tracking indexes of long-term bonds had chalked up year-to-date total returns of close to 10 per cent or so. Who'd have guessed in January that long bonds would by mid-summer have done nearly as well as the S&P/TSX composite index, up 12 per cent for the year to date?
Employment data offers perhaps the most telling insight on the economic challenges that Canada faces. The June numbers document the loss of about 9,400 jobs, which in turn pushed up the unemployment rate to 7.1 per cent from 7 per cent in May. Economists say the employment picture has varied a lot in recent months, so a rebound is certainly possible. But the trend of the past 12 months is dismal. Without Alberta, the country would have seen virtually zero job growth.
The conservative way to hold bonds right now is to focus on the short term, which typically means maturity dates in five years or less. But short-term bonds have barely moved this year. About all you've received if you hold them is a yield in the area of 1 to 1.5 per cent. Long bonds have yields in the low 2-per-cent range, which isn't great. But they offer much better capital gains potential in a weak economic environment. That's how they've produced double-digit returns in 2014.
If the economy firms up and we see a trend of improved jobs growth, long bonds will give back their recent gains in a hurry. More jobs weakness would mean that one of the biggest investment surprises of the year isn't done yet.
Rob Carrick