For years, investing in the bond market has been viewed as the “safe” counterpart to investing in the stock market. However, this perception has been shattered in recent months, as both types of investment have collapsed simultaneously.
Posted yesterday at 5:00 am
Sudden increases in interest rates by the central bank to curb rising inflation hit the bond market hard.
“Simultaneous dips in equity and bond markets, this is unheard of in almost 50 years in financial markets,” says Sylvain B. Tremblay, vice president of Optimum Placements Management, which manages $7 billion in investments in the bond market for institutional investors.
“In fact, what we are currently experiencing, with inflation skyrocketing, is the end of 30 years of interest-rate-cutting monetary policy—a favorable period for bond market valuations—and a precipitous shift toward higher interest rates. of interest rates by central banks, depressing values in the bond markets. »
An indicator of the extent of the depression in the bond markets?
According to Sylvain Tremblay, the current value of the standard portfolio of Canadian bond securities of various durations has decreased by about 9% since the beginning of the year.
This drop in value is even more pronounced, at around 17%, for a standard portfolio of long-term bonds (10 years and over), which are always more sensitive to changes in central bank interest rates.
In contrast, this fall in value is smaller, around 3%, for a standard portfolio of short and medium-term bonds (1-3-5 years), which are less affected by changes in interest rate policy. . of the central banks.
“With very high yields [des taux d’intérêt] of bond securities in the United States across the spectrum of durations, from short to long, the flight of securities and the exodus of investors from the bond markets continues unabated,” observes Hugo Ste-Marie, portfolio strategist and quantitative analysis at Scotiabank World Markets in Montreal, in a recent announcement to its investor clients.
And so ? « Les investisseurs en titres obligataires gardent un œil sur les rapports mensuels sur l’inflation aux États-Unis, car ils pourraient infliger davantage de dommages à la valeur marchande des obligations si l’inflation continue d’être elevée », anticipates Hugo Ste- Marie.
Where to take refuge?
In the meantime, what advice for retail investors invested in the bond markets?
After several years of poor but relatively stable performance in bond markets, many less experienced investors mistakenly believed that bond investments could be as reliable as cash in a portfolio.
Ruben Antoine, portfolio manager at Tulett, Matthews & Associés in Kirkland, in the western suburbs of Montreal
“In fact, because the price [valeur marchande] bonds vary inversely to the evolution of interest rates, an episode of interest rate hikes by central banks such as the one that is happening these days can lower the value of bonds at the same time as the value of shares in bag”, recalls Ruben Antoine.
“In addition, you should know that the magnitude of the changes in the value of fixed-income securities according to the evolution of interest rates depends a lot on their duration before maturity. The value of long-term bonds [10 ans et plus] It is typically much more sensitive to changes in key interest rates than short- or medium-term bonds. »
Consequently, Ruben Antoine underlines, “in a balanced portfolio, investments in bonds or fixed-income funds should be considered like other transferable securities, whose short-term market value may move up or down, although usually less pronouncedly. than actions.”
“That is why investments in fixed-income securities must also be managed and weighted according to the level of risk tolerance of each investor. »
Thus, for individuals with a very low tolerance for risk, and capable of depriving themselves of access to this part of their capital for a certain time, the experts consulted by Press advises sticking to fixed-maturity bonds sold by governments or GICs issued by financial institutions.
“After years of famine, if not zero, government bonds and fixed term GIC [non encaissables avant échéance] became attractive again with the increase in interest rates by the central banks of Canada and the United States,” says David Paré, investment adviser and portfolio manager at Desjardins Wealth Management in Quebec City.
On the other hand, for individual investors with a little more risk tolerance, the downturn in bond stock markets may provide an opportunity to buy back at a depressed price.
“Investors who want to recalibrate the fixed income portion of their portfolio while maintaining flexible access to their capital can take advantage of this unusual episode of falling bond market values to buy shares of bond funds,” suggests Sylvain B. Tremblay. , Vice President of Optimum Investment Management.
Because these bond fund units not only now offer a current return on interest income distribution at a level not seen for many years, but their holders will have the ability to enhance their return with value gains from the first signs of a truce. in inflation and the limitation of interest rates by the central banks of the United States and Canada.
A rare simultaneous drop in values in the stock and bond markets…
– 13%: negative performance of the bond market index in Canada (FTSE Canada Universe Bond Index) since the beginning of the year (as of June 22, 2022)
– 10.9%: negative performance of the Toronto Stock Exchange S&P/TSX index since the beginning of the year (as of June 22, 2022)
…and current yields in interest or in dividends that are approaching, after years of a wide differential favorable to equities.
2.9%: Current yield/interest distributions of the general bond market index exchange-traded fund (XBB) in Canada (iShares FTSE Canada Universe Bond Index fund, as of June 22, 2022)
3.4%: Current Dividend Yield of the Toronto Stock Exchange S&P/TSX Index (as of June 22, 2022)
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