Video - The end of the bull bond market
March 2017 - The end of the bull bond market with our expert Michel Doucet.
SUBJECT: Bond market
EXPERTS : Michel Doucet
Note: The information in brackets "[...]" describes the visual and audio content of the video other than the dialogue or the narration.
[Jinggle music begins. The title ‘’Market Trends’’ appears in a honeycomb cell, then replaced by the video’s title: The end of the bull bond market – March 2017. It all gives way to the Desjardins Securities logo. These images give way to Mr. Michel Doucet in an office. Behind him, we can see computer screens with stock quotes].
Michel Doucet (B. Sc., CIM®, Vice-President and Portfolio Manager, Portfolio Advisory Group)
After more than 30 years of boosting portfolio returns, the bond market is transitioning from bull to bear. Bond yields have been on the rise in North America since september of last year. 10-year Canada bond yields have risen from an almost historic low of 0.94% to a high of 1.85% from the end of September to the end of January. Given a duration of some 9.6 years, this rise in yields translates into a drop of 8.5% in the value of a 10-year Canada bond. About the same as the annual average return of the Canadian bond index over the last 26 years.
This shift from bull to bear is a force to reckon with. It must also be understood so that investors may adapt their investment strategy with regard to bonds. The rise in yields is a reflection of a US economy powering ahead. Riding strong before the November election, the economy is about to get a double shot of high octane from the Trump administration. For the first time since the Great recession, the economy will be getting an helping hand from monetary, fiscal and budgetary policies.
With economic growth already running strong, this accommodative stance could generate inflation and lead the Fed toward a more hawkish stance. This trend has crossed the border into Canada.
Although the Canadian economic and financial backdrop is more nuanced, our bond market travels along side its US peer. Although the Bank of Canada will keep its monetary policy unchanged this year, bond yields will rise nonetheless.
Investors must recognize this shift in trend and act accordingly. Adding a dose of cautionness with regard to bonds is to be considered at this time. In an investment portfolio, bonds have traditionnally occupied the role of stabilizers.
Managing risk in the portfolio is clearly getting more important. The rise in bond yields also reveals an uncomfortable truth for multi-asset investors. For example, a 100 basis point increase in yields is very difficult to compensate for with performance in other assets in the portfolio.
For the first time in more than 30 years, odds are that bonds will not be contributing positively to portfolio returns in 2017. Investors will be counting on equities to do the heavy lifting as they shift their bond strategy toward a capital protection stance. Until next time, active management is your friend in this environment!
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