A weak global economy and a flood of money from safety-seeking investors has dragged bond borrowing costs dramatically lower over the past year and a half. Neither trend shows signs of reversing direction and long-term yields could have even further to fall before the trend to lower rates that began more than three decades ago finally hits bottom.Scott Rothstein/Getty Images/iStockphoto
China's growth is slowing, Europe is struggling and the U.S. is still shaky, so many investors have flocked to safe havens to protect themselves. The American, Swiss and German treasuries have all been popular bets. But with interest rates at deep lows, preserving capital may be getting trickier for investors.
According to David Fry, founder of Lawrence Park Capital Partners, a change in perceptions may be taking place. "We've started to see a small unwind of the 'risk off' trade (which was short euro and buy safe government treasuries)," he said. "So the average investor in Canada is staring at a 1 per cent loss in their bond portfolio this month, and that's before fees."
Indeed, according to calculations done by PC Bond Analytics (based on closing numbers from Aug. 16), the month-to-date return on the DEX Universe All Government Bond Index was down 1.49 per cent. The DEX Universe Bond Index similarly declined 1.35 per cent. "We're at a juncture in time where we've had a 30-year bull market in bonds, with interest rates as low as they've been in 30 years, and what that means is more volatility, very little income and that the traditional objective of preserving capital will be difficult," Mr. Fry said.
A quick scan of the numbers shows the DEX Corporate is out performing the other two Canadian indices – the DEX Government and the DEX Universe – although the monthly return percentage is still in negative territory. Mr. Fry argues that while investors have looked increasingly to corporate bond funds to protect themselves from interest rates, the reality is that its not been enough this month. "You've already lost 1 per cent," he notes. "Now, you have not lost as much as your friends in the broader index or in the government space, but your corporate returns aren't enough."
The takeaway from these numbers is that investors looking to bonds for safety, betting on the continued rally of rising prices, should expect volatility now that interest rates are so low.
Monthly returns from PC Bond Analytics
DEX Universe Bond Index: –1.35
DEX Universe All Government Bond Index: –1.49
DEX Universe All Corporate Bond Index: –0.98