Hank Cunningham.JENNIFER ROBERTS/The Globe and Mail
Hank Cunningham is fixed income strategist at Odlum Brown.
Top Picks:
TransAlta (TA.T)
This credit was recently downgraded by Moody's to below-investment grade status, but both DBRS and S&P maintain an investment-grade rating. At over 600 basis points higher in yield than Government of Canada bonds, these bonds offer attractive relative value. The company recently reduced its dividend to conserve cash. The company is forecasting EBITDA in the $1-billion area for the next two years, which should ensure continuing good interest coverage.
CN Rail (CNR.T)
This is a solid single-A credit at 140 basis points above the Canada yield curve. My preference is to maintain as high quality as possible in a bond portfolio. This bond should produce a positive return.
iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (XHY.TO)
This is a high-yield ETF from iShares. It invests in the U.S. High Yield Market and is hedged to the Canadian dollar. It offers a diverse approach to the U.S. HY market with 892 issues in the portfolio. Its yield to maturity is just under 9 per cent, more than 700 basis points above U.S. Treasury bonds.
Past Picks: February 11, 2015
iShares 1-10 Year Laddered Corporate Bond Index ETF (CBH.TO)
(One-to-ten year Corporate Bond Ladder)
Then: $20.24 Now: $19.66 -2.87% Total return: +0.94%
Brookfield Office Properties (BPO.PR.X-T)
Then: $105.88 Now: $102.69 Total return: 4.42%
iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (XHY.TO)
Then: $21.32 Now: $17.91 -15.99% Total return: -10.50%
Total Return Average: -1.71%
Market outlook:
The world did not end when the Fed raised the funds rate. It also signalled the possibility of four more rate increases this year, although the street thinks that there may be only two.
We continue to be in a world of lows: low inflation, low growth, low commodity prices, and low interest rates. There appears to be little to disrupt the status quo. Investors can expect modest returns in fixed income markets. The high yield bond market offers attractive risk/reward possibilities with yields over nine per cent on a plethora of issues.
Despite the obvious issues in the energy patch, default rates remain relatively low. Canada faces economic challenges, emanating principally from sliding energy and other commodity prices. The weak currency has yet to deliver much in the way of improved exports. While imported inflation will pick up, the Bank of Canada may have to lower rates again. It is more important that the federal government introduce its infrastructure spending plan in short order, as Canada is running out of monetary weapons.