The reversal of decades of interest rate declines has revealed an ugly side to owning bonds, but let’s not get too caught up in appearances.
Bonds are still the Number One way to protect portfolios from sharp stock market declines. You can see this in recent one-month comparative returns for stocks and bonds. Globeinvestor data shows that the FTSE Canada Universe Bond Index was up 0.2 per cent while the S&P/TSX composite index fell 2.7 per cent, the S&P 500 fell 7.4 per cent and Nasdaq fell 12.1 per cent.
Let’s not kid ourselves about bonds - they have fallen hard in price this year. Interest rates are rising to subdue inflation, a development that is negative for bonds. Over the past 12 months, bonds have fallen more than the S&P/TSX composite and S&P 500 indexes. No wonder I keep hearing from readers asking if they should sell their bonds and buy guaranteed investment certificates.
Bonds have calmed down in late May, though. Prices rebounded mildly and yields eased off the highs seen earlier in the month (yields and prices move in opposite directions). Investors are digesting the idea that rising rates will slow the economy down and possibly lead to recession. If that’s the case, then the bulk of the damage to bonds from higher rates may already be behind us.
A less negative outlook for bonds may be helping them perform their critical mission of providing returns that are not correlated to stocks. If nothing else, bonds are reminding investors that current market conditions we’ve seen in the past year are an anomaly. Over decades of investing, bonds will provide an effective hedge against stock market declines.
Something else bonds are doing today is providing more interest income. The after-fee yield to maturity on bond ETFs tracking the FTSE Canada Universe Bond Index is about 3.3 per cent these days, compared to about 1.4 per cent in early 2021. Investment-grade corporate bonds maturing in five years or less offered yields in the low 4 per cent range in late May.
Investors who buy bonds today can lock in these yields and, if they’re patient, they might see some price gains as well in the months and years to come. Also, they get some protection against stock market declines. In the long term, that’s the top reason to own bonds.
-- Rob Carrick, personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
Dollarama Inc. (DOL-T) Investors are having a tough time trying to figure out what to do with retailing stocks right now, given soaring inflation and signs of an oncoming recession. But if last week’s activity is any indication, low expectations can lead to big returns. That’s particularly true among humble dollar stores, which may be turning the tumultuous backdrop to their advantage. David Berman reports.
Short sales on the TSX: What bearish investors are betting against
Short sellers were slightly less bearish on the direction of the TSX in May. But the cryptocurrency sector attracted a lot of bearish interest. And investors are still betting heavily against Air Canada. Larry MacDonald reviews the latest short positions.
Investing prof George Athanassakos puts 50% of portfolio in cash and finds only one stock worth buying
Finance professor George Athanassakos has some bad news for investors waiting to buy beaten-down stocks. “Buying the dips will no longer work,” said Dr. Athanassakos, who holds the Ben Graham Chair in Value Investing at Western University’s Ivey Business School. Unlike previous downturns, he believes the U.S. Federal Reserve’s near-term monetary policy moves won’t appease investors, given the combination of runaway inflation and ballooning debt that has made economies and financial markets overly sensitive to interest rate increases. Dr. Athanassakos recently shared some insights with The Globe and Mail about his investing style and what he’s been buying and selling lately.
Shrinking stocks likely mean more LME metal price volatility
Dwindling stocks in London Metal Exchange registered warehouses mean wild price swings for metals such as copper, tin and zinc are likely to be a feature of the market for some time.
Others (for subscribers)
Monday’s Insider Report: Large shareholder invests $3 million in this stock after a second dividend hike in 2022 is announced
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
Ask Globe Investor
Question: I bought a stock in a non-registered account for $1. It is now trading at 10 cents. I haven’t given up completely on this stock as I am still thinking it has hopes of a comeback. I was thinking of buying this stock at 10 cents in my TFSA, and then selling the stock in my non-registered account, so that I can claim the capital loss. Can I claim the loss if I do this? – Vince
Answer: Be careful of a twist called the superficial loss rule. CIBC Wood Gundy explains it this way: “If you sell a security to trigger a loss, and you or an affiliated person (for example, your spouse, a corporation you control, or a trust where you have a major beneficial interest, including an RRSP) purchases an ‘identical security’ within 30 calendar days before or after the sale date, and that person still owns that security 30 calendar days after the sale date, then the capital loss is denied to you and added to the cost base of the person who bought it.”
A TFSA, like an RRSP, would be governed by the superficial loss rule. So, to be on the safe side, you should wait 30 days after selling the shares in your non-registered account before repurchasing them in your TFSA.
--Gordon Pape (Send questions to firstname.lastname@example.org and write Globe Question in the subject line.)
What’s up in the days ahead
Bond markets have started to turn around - but will this trend have staying power in these inflationary times? Tim Shufelt will take a look.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff