Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about interest rates with Dustin Reid, vice president and chief fixed-income strategist with Mackenzie Investments. We talked about the different approaches to monetary policy in Canada vs the U.S., and what fixed-income opportunities he sees. And we started by asking how well central banks have managed against a stubborn economic background.

Dustin Reid (DR): I think the banks have done quite well. Clearly, most banks missed a little bit on the transitory inflation narrative, but probably caught that mistake relatively quickly, and then hiked rates quickly thereafter, to kind of get back in line. And I think we’re kind of on the other end of that, where inflation looks to be slowing. But clearly, the U.S. economy’s operating at a very strong rate. Productivity is extremely high, the labour market’s very tight. Here in Canada we’re seeing a little bit more consternation in the real economy. Growth is quite a bit slower. The labour market is not in bad shape by any stretch, but it’s clearly well off its lows. There are obviously structural and cyclical issues that are specific to Canada, and obviously the Bank has to deal with those types of challenges. But, overall, I think that the banks have handled things relatively well.

What could disrupt anticipated rate cuts later his year?

DR: Well that’s a good question. For the Fed in the U.S., I still think May is very likely for the first rate cut for the cycle because the inflation data continues to come in very friendly, and right around the Fed’s target, particularly when you look at what the Fed’s been focusing on: the six-month annualized core PCE number, which is actually trending below 2%. As long as the Fed is relatively sure that inflation isn’t going to spike back higher, then I think the Fed’s going to be relatively comfortable easing rates this year, and starting in May in embarking on a rate-easing cycle of maybe even as much as 150 basis points. In Canada, the market’s very focused between the April and the June meetings, kind of bouncing back and forth. The inflation data here has been a little bit stickier or structural in Canada. And that’s definitely causing the Bank and Governor Macklem a little bit more concern about easing rates maybe a little bit early. The Bank’s in a tough spot here, where the Bank has maybe higher inflation than expected and a weaker economy, while in the U.S., you kind of have the opposite problem, where the economy is quite hot and inflation is coming in quite a bit weaker. Despite the irony, you still may end up with similar policy outcomes. But I do expect the Bank of Canada to cut at least 100 basis points this year, and if it doesn’t start in April, it will probably start at the June meeting.

Fixed income opportunities

DR: We generally like North American duration. But kind of beyond that, some other trades that we like are in the EM space. Since last year, we’ve been buying Mexico and Brazil local currency debt, so in Mexican peso and Brazil real. And we like those trades. We’ve added them to our portfolio, unconstrained, because the real yields in those countries have been extremely attractive. Of course with every EM trade, you have to be very, very careful about the idiosyncratic risks in that particular country, as well as the global macro landscape. But we were pretty comfortable with that. And it’s turned out to be quite good trade for us. Another trade that we’ve been looking at for a while is the investment-grade side, kind of that three- to seven-year space, picking up high-quality Canadian or North American firms that are paying a premium over the sovereign curve, that have very little chance of defaulting, and picking up that additional yield. And also getting, kind of, the global macro tailwind, so to speak, with that curve-steepening idea, front-end rates coming lower, Bank and Fed cutting rates, and so you get the global macro effect of the whole curve coming lower, but also picking up that extra coupon, in the IG- and the investment-grade space. So those are a few that we’ve really spent a lot of time focusing on, that have done quite well for our funds.

And finally, what’s the bottom line on fixed-income investing in the current environment?

DR: It’s probably a good time for duration and a good time for investors to make sure that they’re invested in fixed income after a couple of tough years. We continue to expect the front end, and the belly, and the mid-part of the curve to do well as part of a balanced portfolio. We continue to like things not only in the sovereign space, but also in the investment-grade space that look very attractive to us with these spreads and this earnings environment, particularly in the U.S., with an economy that seems to be doing quite well. So we’re going to continue to focus on the rate-easing cycle for the balance of ’24 and into ’25, as it relates to fixed income and where to find value for our investors in our funds.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Dustin Reid of Mackenzie Investments. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


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