Safe investments get pounded sometimes.
That's a lesson to be drawn from the recent rout in bond markets. Government of Canada bonds have been trounced much harder than corporate bonds, which are flat out riskier. A government can always resort to tax increases to meet its debt obligations, while corporations are constrained by the need to price their goods and services competitively.
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You can hold a Canada bond and not spare a moment's worry about whether you will get your semi-annual interest payments on time and your money back at maturity. Canada's credit rating with Standard & Poor's is AAA, with a stable outlook. That's as solid as it gets. And yet, government bond prices have been savaged lately. You can best see this in how yields have soared (yields and prices move inversely). In just eight trading days earlier this month, the yield on the five-year Canada bond surged to 0.97 per cent from 0.66 per cent.
If you own government bonds, get used to seeing your holdings fall in price. This says nothing about the security of the bonds in terms of interest paid and capital repaid at maturity. Rather, it's a sign that investors are souring more on government bonds as they look at what might be ahead for the global economy than they are on corporate bonds. There are concerns that government debts are rising to alarming levels that raise default risks. Not in Canada, but in Europe and even in the United States. The U.S. economy is growing, but president-elect Donald Trump's economic plans might add significantly to the deficit. That increases the risk in U.S. government bonds, even if outright default risk is exceptionally remote.
Corporate bonds are losing ground, too. But investors are less nervous about them because the outlook for growth and inflation suggests a better profit picture for business. By all means tilt the bond holdings in your portfolio to corporate debt. But if you own government bonds, don't sweat the price decreases you're seeing in your account. Government bonds are getting pounded these days, but your money's as safe as it ever was.
Rob Carrick