The ups and downs of the Canadian and U.S. economies this year offer some intelligence for investors wondering what to do about bonds.
Frankly, you should find the right allocation of bonds for your age, goals and risk tolerance and leave it at that. However, investor behaviour in the past year shows there are many people who are keen to time their moves in and out of bonds to miss what they imagine will be the first bear market for bonds in recent memory.
The latest economic data out of Canada and the U.S. suggests there's too much uncertainty out there to justify a move to reduce or even eliminate your bond holding. It's not hard to find commentary that says the North American economy had a bad patch in the winter due to especially bad weather, but is poised to gain strength. Don't bank on it. Hold those bonds in case growth disappoints yet again.
The rewards of doing so have been demonstrated during a recent bond market rally that as of May's end took yields to the lowest level of, first, calendar 2014 and, second, since last June. This explains why the biggest bond exchange-traded and mutual funds were up between 3.6 and 4.2 per cent for the year through May 29. If you were brave enough to hold a long-term bond fund, your YTD gains would have been in the 6.5 to 9 per cent range.
It was just about a year ago that bonds began a plunge triggered by a widespread feeling that economic growth was firming, interest rates were headed higher and the long bull market for bonds was over. This view was supported by the U.S. Federal Reserve's announcement that it was looking ahead to scaling back its support of the bond market. That scaling back has actually begun, but the economy hasn't delivered as expected. Thus, we have those disappointing first-quarter GDP numbers, and a buoyant bond market.
Last summer's bond rout will be replayed at some point, and the price of bonds and bond funds will fall. Until that happens, there could well be more of those economic disappointments that make bonds look good.
Rob Carrick