Go Long with Provis
In a normal yield environment, long-term bonds come with a higher yield than shorter bonds, allowing owners to roll down the yield curve.
That is, assuming the yield curve doesn’t change, long-term bonds will be discounted using a lower rate, and thus have a higher price as time goes by. However, the benefits of this roll down are highly dependant on the shape of the yield curve – the steeper it is, the greater the benefit of long-term bonds over shorter ones. With the flattening of the curve of late, long-term bonds have lost some of their luster. But given that bonds with a maturity over 15 years account for nearly 30% of the Canadian Bond Universe, we can’t just ignore this part of the curve and wait for a steepening. So where can we find the value right now?
With the Canadian 30-year yield at around 1.5% and inflation running at 2.2%, a buyer of Canada long bonds is losing 70 basis points on a real basis. Meanwhile, long-term Canadian corporates can yield you about 3.2%. But with an economic slowdown still being a possibility – last week, the Bank of Canada lowered its growth forecast, citing unexpectedly soft consumer confidence and spending – we don’t love the risk-reward trade off in the long-term corporate space. Overall, we favour a bullet approach to bond investing at the moment, but from a risk-return perspective we think provincial long bonds, which can get you a respectable 2.4% yield and which are trading at their tightest spreads versus corporates in nearly two years, are the best choice for those seeking to invest in the longer part of the curve.
Jean-Guy Mérette
Vice President and Portfolio Manager
Active and Strategic Fixed Income Team
Disclosures
This information is prepared by Fiera Capital Corporation (“Fiera Capital”) and is intended for use by residents of Canada only. The information and opinions expressed herein are provided for informational purposes only, are subject to change and should not be relied upon as the basis of any investment or disposition decisions. Past performance is no guarantee of future results. All investments pose the risk of loss and there is no guarantee that any of the benefits expressed herein will be achieved or realized. Valuations and returns are computed and stated in Canadian dollars, unless otherwise noted.
The information provided herein does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information. Any opinions expressed herein reflect a judgment at the date of publication and are subject to change. Although statements of fact and data contained in this presentation have been obtained from, and are based upon, sources that we believe to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. No liability will be accepted for any direct, indirect or consequential loss or damage of any kind arising out of the use of all or any of this material.
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