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BMO’s Robert Kavcic is the latest economist to warn of rising inflation pressure in Canada, noting the latest Bank of Canada survey which found that 60 per cent of business owners were reporting capacity constraints in terms of workers or inputs.

Mr. Kavcic emphasized that these constraints are clear precursors to broad wage and price inflation but elsewhere markets were showing a complete disregard for inflation pressures. Longer terms bond yields, which normally reflect inflation and growth expectations and would be expected to rise, have fallen considerably of late.

The Canadian 10-year bond yield, 1.61 per cent on March 18, has dropped to 1.3 per cent, reflecting a similar yield drop in the U.S. treasury of the same duration.

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In Why Aren’t Interest Rates Higher?, U.S. portfolio manager Ben Carlson cites demographics as a central reason for depressed yields. He points out that U.S. baby boomers have roughly US$70-trillion in wealth, and 10,000 of them are retiring every day this decade. The need for steady income is thus extreme, driving demand for bonds and keeping yields (which move in the opposite direction of bond prices) low.

Central bank quantitative easing initiatives - open market bond purchases in other words - are another factor, creating further demand for fixed income assets.

Neither of these explanations are entirely satisfying to me. Boomer retirements and quantitative easing programs have been consistent forces – they were also present when yields were shooting higher in the latter half of 2020.

There are numerous services-oriented business sectors in North America that have only recently re-opened and nowhere near full capacity but bond markets are already signaling a slowdown.  This signals rising risk for reflation trades, and indeed copper prices, for instance, are enduring a significant correction.

On the bright side, bond ETFs should continue to perform well as long as current trends persist. But the outlook for most other risk assets will remain unclear until markets provide further clues on the economic future.

-- Scott Barlow, Globe and Mail market strategist

Also see: Reflation rethink sends bond markets into a spin

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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

Softchoice Corp. (SFTC-T) Investors may want to put this newly listed small-cap tech stock on their radar screens, especially if the share price were to pullback after a remarkable rally experienced in mere weeks. Even income investors may want to take a look, as it’s about to pay its first dividend. Jennifer Dowty takes a look at the investment case.

The Rundown

A risk-averse retiree wonders about the investment returns he should expect

The hardest job in investing these days is trying to eke out a decent return from a conservative portfolio. To get an idea of what the future might bring for conservative investors, Rob Carrick did some crowdsourcing on Twitter. Here’s what he found out, and what investors can do to help juice bond returns.

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Canada’s oil sands producers are awash in cash flow again, but ESG concerns weigh on stock valuations

A rapid rise in the price of Canadian crude is putting investors in an unusual position, prompting them to weigh environmental concerns against the copious cash flows that oil sands producers are now churning out. Tim Kiladze reports.

BlackRock bearish on Treasuries, cuts U.S. equities to neutral

BlackRock, the world’s largest asset manager, said on Wednesday in its mid-year investment outlook that it has turned more bearish on U.S. Treasuries and views current bond market valuations as “very full.”

Why the value premium for Canadian stocks is not dead

The poor performance of value stocks versus growth stocks over the past decade has led to the belief that the value premium is dead. This, however, seems to be more a U.S. market phenomenon. The Canadian value premium persists, particularly for stocks with low prices. Dr. George Athanassakos looks at what’s behind it.

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Others (for subscribers)

Number Cruncher: Fifteen attractively valued U.S. moat stocks that are probably not on your radar

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Forgotten tin tops energy transition metals leader-board

Globe Advisor

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Six REITs that can deliver when interest rates begin to rise

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Ask Globe Investor

Question: I’m 59, and a longtime employee with one of the big telecoms. I have about $200,000 of my employer’s stock – all in my RRSP and TFSA – and an additional $50,000 from an insurance settlement that I am starting to invest. I have opened two TFSA accounts with Wealthsimple – one self-directed and one robo-adviser – and a third TFSA with Questrade’s Questwealth robo portfolios. In addition to my employer’s stock, my individual holdings include TD, Granite REIT, Vanguard’s S&P 500 Index ETF (VFV) and asset-allocation ETFs from Vanguard, iShares and Horizons. Can you provide any feedback?

Answer: First, having 80 per cent of your portfolio invested in one company violates one of the cardinal rules of investing, which is that you should diversify to control your risk. Fortunately, because all of your company shares are held in your registered retirement savings plan and tax-free savings account, you won’t incur any capital gains tax if you sell a portion of them.

My second concern is that, by opening multiple accounts at different financial institutions and buying everything from banks to real estate investment trusts to asset-allocation ETFs (from three different providers, no less) you seem to be proceeding without any sort of plan. The danger is that you will make your investments far more complicated and difficult to manage than they need to be.

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Unless you have some experience managing a portfolio of stocks, you might be better off investing primarily in ETFs – either directly or through a robo-adviser – at least for now. You could, for example, get all the diversification you need with one or two asset-allocation ETFs that provide global exposure to stocks and bonds.

To save even more on costs, you could purchase individual index ETFs instead. You already own VFV, which tracks the S&P 500. For Canadian exposure, consider an ETF based on the S&P/TSX Composite Index (I discussed two examples in my column last week).

Finally, think about how many separate accounts and financial institutions you really need. Especially as you get older, you may find that the complexity becomes a burden.

With investing, less is often more. If you keep your costs down, stay diversified and keep things simple, time will do the heavy lifting for you.

--John Heinzl

What’s up in the days ahead

Ian McGugan probes further into what the bond market is trying to tell investors.

Click here to see the Globe Investor earnings and economic news calendar.

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

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