It’s time for investors to get past the painful losses the Canadian bond market inflicted on them.
The FTSE Canada Universe Bond Index lost 11.7 per cent last year, and the annnualized three-year loss was 2.2 per cent. Those losses were quite something, but it’s now time to move on. In early 2023, bonds look interesting again.
For January, the FTSE Canada Universe Bond Index was up 3.1 per cent. There’s a growing sense in financial markets that central banks are finished, or very close to done, with raising interest rates to combat inflation. Price increases are still too hot for comfort, but the rate of growth is edging lower. Interest rates might not actually fall until much later this year or early next. But the bond market is already pricing in the idea that rates have peaked.
This is where bonds offer some appeal over guaranteed investment certificates, which have become popular in the past year because they offer high rates and zero risk if you stay within deposit insurance limits. A bond or bond fund offers a total return based on interest plus changes in price. So far in 2023, prices are rising.
GICs don’t fluctuate up or down in price – that’s part of their appeal. But you do miss out on the upside that bonds are experiencing right now.
Alternative banks still offer 5-per-cent guaranteed investment certificates for terms of one through five years, but the selection seems to be shrinking by the day. If you own a bond exchange-traded fund that tracks a broad Canadian bond index, then your after-fee yield on money invested now should be in the range of 3.8 per cent to 4.1 per cent.
A mix of GICs and bonds can make good sense for investors trying to balance the stocks and equity funds they own. GICs lock in a strong yield and thereby provide predictable returns, come what may with inflation and interest rates.
Bonds will tank again if inflation pushes higher and central banks have to resume rate hikes. But if rates have in fact peaked, then there’s some runway in the next 12 to 24 months for bond prices to rise.