Cullen Roche, founder and chief investment officer for California-based Discipline Funds, is excited about fixed income investing for the first time in forever. He believes that interest rates and bond yields are set to peak, and the impending decline in yields will be lucrative for bond investors.
Mr. Roche believes the U.S. Federal Reserve is in the midst of a policy mistake, raising rates too aggressively when an economic slowdown in imminent. He estimates that the U.S. policy rate, currently 3.75 to 4 per cent, will average 2 to 3 per cent over the medium term.
Bond yields follow central bank rates. Because bond yields and bond prices move in opposite directions, the decline in yields Mr. Roche expects will result in profits for fixed income investors.
The concept of risk-adjusted returns is important here. Unlike equities, bonds provide certainty of returns if held to maturity. The exact math changes over time, but it is important to recognize that an average annual bond return of 3.1 per cent for 10 years (this is the current yield of the domestic 10-year government of Canada bond) is worth more than a potential 10-year average return of 4 per cent, for example, on equities.
“I wouldn’t be surprised if people look at current rates in five years and say ‘man, we coulda locked in 4% on a 10 year,’ ” Mr. Roche wrote, referring to U.S. bond yields. “I still think stocks have the potential to be messy in the coming years as housing unfurls, but bonds … are starting to look more and more attractive here.”
I agree that bonds and bond ETFs are becoming appealing, particularly for older, risk-averse investors that can ill-afford a long period of equity market volatility. Returns on fixed income are far from exciting, but the stock market rollercoaster ride of 2022 has reminded many investors of the hazards of equity investing and how painful they can be.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Loblaw Companies Ltd. (L-T) The stock has been in a downturn in recent weeks, but that changed Wednesday, when the company released better-than-expected third-quarter financial results. As Jennifer Dowty tells us, there’s a lot to like here, including attractive earnings growth, reasonable valuation, share repurchases and a reliable and growing dividend.
Algonquin Power & Utilities Corp. (AQN-T) The company has long been prized by investors looking for the stability of a utility, the growth of a renewable power operator and the big payout of a dividend powerhouse. Now, though, these three reasons for owning the stock look increasingly frail. David Berman looks at Algonquin’s very rough few days in the stock market and whether investors should take a chance on a turnaround.
Tesla Inc. (TSLA-Q) A self-described “nanomanager,” Elan Musk’s penchant for working long hours in moments of crisis has been a well-known part of his brand. But as Reuters reports, the billionaire’s deep dive into Twitter, after a protracted buyout that he tried to scrap, has some Tesla investors worried about his capacity to focus on his role as CEO of the world’s most valuable carmaker.
Canada corporate bond market issuance perking up again
Canadian corporate bond issuance has begun to rebound after a lull of 10 months, with companies plotting expansion plans and central banks apparently close to the peak of their current cycle of interest rate hikes. Companies including Enbridge, Bell, Bank of Nova Scotia and Brookfield Renewables raised a combined $4-billion by issue of new corporate bonds in the first week of November, capping the busiest week for issuance in six months. As Reuters reports, some new bonds drew investors by offering juicy yields upwards of 5%, attractive for high grade fixed income products at a time of high volatility in the equity markets.
Fed may harangue markets to prevent premature pivot
The euphoria that engulfed markets last week after surprisingly soft U.S. inflation figures was understandable. But be careful what you wish for. The surge in stocks and bonds, and steep dollar slide last week sparked one of the biggest loosening of financial conditions in decades. If that continues, the Fed may feel obliged to step even harder on the rate-hiking pedal - cutting across markets just like it did this summer, reports Jamie McGeever.
Others (for subscribers)
Tuesday’s Insider Report: CEO is buying this large-cap dividend stock
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What’s up in the days ahead
Rob Carrick provides five things you should and should not do with your TFSA as the new $6,500 annual contribution limit kicks in next year. Plus, Tim Shufelt reports on what the impact will be on energy stocks from Ottawa’s recently announced share buyback tax.
More Globe Investor coverage
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Compiled by Globe Investor Staff