Bond roll

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Recent central bank moves and a looming threat of recession suggest a positive outlook for Canadian fixed income, says Konstantin Boehmer, portfolio manager and senior vice-president, investment management, with Mackenzie Investments.

Despite a rough start for bonds this year, Boehmer said the tide is turning, and his current list of global fixed-income picks looks very different from last year’s, when North American monetary policy appeared to lag that of other developed economies.

“[Our list] has shifted because we would like to be invested more in the countries which have aggressive central banks,” he said. “The duration shorts that we have in our global portfolios are actually in Europe and in Japan. And the areas where we have long duration are in Canada and in the U.S.”

Boehmer, who is head of global macro and quantitative analytics and co-lead of Mackenzie’s fixed income team, is particularly optimistic about the global ranking of domestic bonds.

“Canadian fixed income, on a comparative scale of which bond market looks most attractive, is pretty high up there,” he said. “Maybe it even has the top spot, as in the most attractive fixed-income place globally.”

Bond strength could grow further if the economy falters, he added. Recessions tend to be good for fixed income, and it will be hard for Canada to avoid one, given recent interest rate hikes and factors like high personal debt, swollen mortgage costs and the risk already priced into markets.

“We’ve borrowed a lot of money. A lot of money is in the housing market. A lot of money has been spent on wealth accumulation, alongside the massive gains that we’ve seen on the real estate side,” he said. “If the cost of money is going higher, that has a direct impact on the spending power.”

Boehmer said inflation was the big stumbling block for fixed income earlier this year, but there is increasing confidence that we have hit peak inflation.

“The inflationary side is a lot more certain, I believe, as it pertains to how that will play out in the next few months and quarters,” he said. “We don’t see central banks pivoting too quickly [away from aggressive monetary policy]. And if they remain on the path that they’ve been on now for the last few months, that will eventually slow down the economy. That is almost like the trump card in the inflationary game.”

The longer the maturity, the more likely bondholders will be to reap good rewards, he said.

“The longer you go, the more you look through what is happening right now,” he explained. “Anything maybe five years and out actually starts to look quite interesting. Longer-dated maturities could actually perform quite well in this environment.”

Boehmer said investors shouldn’t focus on the rough start for fixed income in 2022.

“Don’t look at past performance to guide your decisions going forward,” he said. “If we look at fundamentals, valuation, macroeconomic outlook, and maybe also that negative correlation with equities, I think higher-quality Canadian fixed income looks like a pretty good buy.”


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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