The unthinkable is happening for bond investors: double-digit declines

Bond ETFs have been available in the Canadian market since 2000 and the results since then have been rather good over that entire period.

The annualized total return for the iShares Core Canadian Universe Bond Index ETF (XBB-T) since inception in November 2000 is 4.5 per cent. Not bad for an asset that you hold for stability in tough times more than anything else. Also, that’s double the average 2.1 per cent inflation rate from 2000 to 2022.

Today, bond ETFs are getting crushed. XBB’s year to date total return - that’s change in unit price plus bond interest - was negative 10.3 per cent for the year through April 22. The first-quarter loss was 7 per cent and the 12-month decline was 4.6 per cent.

Bonds and the exchange-traded funds that hold them are going from bad to worse. We are seeing something that was once unthinkable: double-digit losses from bond funds.

Bonds are getting crushed by the worsening outlook for interest rate increases. The March inflation rate hit 6.7 per cent, compared to 5.7 per cent in February and 5.1 per cent in January. This trend suggests harder, faster rate increases from the Bank of Canada, and more adversity for bonds.

There is a strong argument to be made for holding short-term bonds and bond ETFs right now instead of the more broad-based funds that hold medium and longer-term bonds as well. You get more yield from the broad-based funds, but much more vulnerability to rising rates. An XBB sibling, the iShares Core Canadian Short Term Bond Index ETF (XSB-T), has a year-to-date decline of just 3.8 per cent. The Horizons Ultra-Short Term Investment Grade Bond ETF (HFR-T) was off 1.8 per cent for the first three months of the year.

Floating rate bond ETFs are another thought - the iShares Floating Rate Index ETF (XFR-T) has a year-to-date decline of only 0.1 per cent, while the CI Global Asset Management has just announced a lower-cost ETF version of the CI Floating Rate Income Fund (CFRT-T), a mutual fund that has a first-quarter loss of 1 per cent. Floating rate bonds have their interest payments adjusted according to changes in interest rates.

GICs are another possibility for investors who don’t need the liquidity of bonds or bond ETFs, which can be sold easily at any time. There are cashable GICs, but you give up some yield for that convenience. One-year GIC rates from alternative banks are as high as 3.1 per cent in late April. Not a bad place to park money when bonds are flirting with double-digit losses in 2022.

-- Rob Carrick, personal finance columnist

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Stocks to ponder

Home Depot (HD-N, HD-NE) These are rough times for the stock market and there is probably more trouble ahead. Companies that shone during the pandemic are now out of favour. Home Depot is one of them, and Gordon Pape thinks the retail home improvement giant is a good buy among the battered rejects. Shares, which are available as a hedged Canadian Depository Receipt in addition to their New York listing, are down about 28 per cent from recent highs.

Algoma Central Corp. (ALC-T) This stock is nearing oversold territory and approaching strong technical support. Algoma operates a fleet of vessels, carriers and tankers travelling through the Great Lakes – St. Lawrence Waterway. With a unanimous buy recommendation among analysts, the stock offers investors potential total return of over 40 per cent (37 per cent potential price return along with an attractive 4 per cent dividend yield). Jennifer Dowty looks at the investment case.

Netflix Inc. (NFLX-Q) and Shopify Inc. (SHOP-T) The U.S. movie-streaming pioneer and the Canadian e-commerce giant might not appear to have a lot in common. But they are now locked in a similar battle: trying to convince investors that they can still expand at a brisk pace. As David Berman tells us, the two companies are in for a tough slog – and investors will have lots to consider as they weigh falling share prices against an operating environment that no longer looks as enticing as it did during the depths of the pandemic.

The Rundown

Bruised Wall Street faces gauntlet of worries after market tumble

Battered U.S. stocks are facing a potentially painful stretch in the weeks ahead, as hawkish Federal Reserve policy, rising bond yields, geopolitical uncertainty and the corporate earnings season fuel investor unease. Lewis Krauskopf and Saqib Iqbal Ahmed of Reuters look at the challenges investors are facing.

Also see: Cash shifts pull rug under equity markets: strategists

Why is gold holding up so well when interest rates are marching steadily higher?

Sometimes the market provides us with an interesting mystery. Right now, the mystery is why gold is holding up so well when interest rates are marching steadily higher. Gold usually moves in the opposite direction to real interest rates – that is, interest rates after deducting for the bite of inflation. When real rates go up, bullion prices go down. There are excellent reasons why this relationship has held true in the past. But no longer. How can we explain this? Ian McGugan tries his best.

Can’t fight the crypto FOMO? Here are some ETFs to consider

Although the Canadian crypto ETF space is barely a year old, fund companies have been busy innovators. The vast majority hold spot crypto assets, two utilize covered-call options to boost yield, a few are “green” using carbon offsets and another invests in multiple crypto asset ETFs and related stocks. Paul Brent looks at the options.

Bears tip-toe back into copper market as demand fears grow

Copper prices were under pressure Monday morning, with London Metal Exchange (LME) three-month metal falling below the $10,000 per tonne level for the first time in a month. Copper has spent the last few weeks hanging in suspended animation, the price too high for buyers to chase the market, supply too tight for sellers to risk shorting it. The risk equilibrium appears to be shifting, however, with signs that funds are starting to raise bear bets on the CME copper contract. Andy Home of Reuters explains.

Warren Buffett faces renewed climate change challenge by investors

Investors concerned about climate change have developed an effective playbook for getting companies to set more ambitious goals for reducing greenhouse gas emissions by pressuring, shaming and cajoling executives. But those tactics are not working on Warren Buffett and his Berkshire Hathaway conglomerate, which owns energy companies, a railway, insurance companies and other businesses that pump huge amounts of carbon dioxide into the atmosphere. As Buffett holds out, critics complain that Berkshire’s businesses are doing less to cut emissions than similar companies. Peter Eavis of The New York Times reports.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: CEO invests over $1 million in this gold stock

Ask Globe Investor

Question: I understand that dividends paid by a U.S. stock in a TFSA are taxable because the U.S. doesn’t recognize the Canadian TFSA as a tax-free account. If I sell shares of a U..S stock inside my TFSA that has accrued a capital gain, am I taxed on the capital gain?

Answer: No. Capital gains are not affected by this rule. The reason there is a 15-per-cent withholding tax on U.S. dividends is that Washington does not recognize a TFSA as a retirement account. Dividends paid to RRSPs, RRIFs, and LIFs are not taxed.

--Gordon Pape

What’s up in the days ahead

Worried about Canada’s big banks getting swept up in the broader market selloff? David Berman will take a look at what could happen next.

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

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Compiled by Globe Investor Staff