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 fixed-income investing with Mark Hamlin, vice president and portfolio manager with Mackenzie Investments. We talked about corporate and sovereign debt, monetary policy, and we started by asking about the diversification benefits of fixed income in portfolios.

Mark Hamlin (MH): When you see equity gains, and when you see a substantial move up in that side of your portfolio, it makes more sense to have that balanced a bit. If yields are giving you some income — which they are now, right? You’re getting that, kind of, 5.5% to 6% yield in the short end of the Canadian curve — it makes some sense to have both that yield, and that potential for price appreciation, and to have maybe taken a little bit of your equity profits and locked them in. Right now, where we’re sitting, it makes a lot of sense to have some fixed income sleeve.

Sectors he’s cautious of

MH: Obviously central banks around the globe have been raising interest rates for a couple of years now to fight inflation. And those higher rates have started to bite in a couple different ways. So consumers here in Canada are feeling the bite in the form of increased mortgage payments and higher car payments and higher interest on debt. And so this crimps spending in other areas. So we have to be super careful about where we think the Canadian consumer is going to continue to spend. They’re going to continue to buy food, and they’re going to continue to pay rent, and they’re probably going to continue to pay their cell phone bills, but a lot of other stuff becomes discretionary. And we’re not as keen on investing in those kinds of sectors.

Opportunities in corporate credit

MH: We think that investing in high-grade corporate Canadian bonds at the short end of the curve is probably, maybe globally, one of the best places to invest right now. We like Canadian over U.S. because, actually, U.S. credit spreads are a bit tighter than Canadian credit spreads. We also like the short end of the curve because as central banks have raised rates over the last couple of years, the long end of the curve hasn’t kept up. And so the short end of the curve is giving you more yield for less risk. And also the Canadian economy is really super interesting, because it’s got some sectors that are really oligopolistic and really kind of safe. If we look at the banking industry in Canada, there’s kind of five or six big ones. We’re expecting these higher interest rates to cause a bit of an economic downturn. That’s going to stress the banks. Their earnings are going to be a little bit worse. Their margins are going to be a bit thinner. They’re going to have more loan-loss provisions. But they’re not going to default on a bond. The telecoms industry in Canada, again these are really safe, and you’re getting well compensated for any kind of credit risk. And although we might see credit spreads widen the bit here, actually we don’t think there’s really any chance of default or losing money with those investments. So we really like those.

Sovereign bonds

MH: We think that the Canadian economy and the Canadian consumer is a little bit at risk here. Rising interest rates around the world has different effects in different countries. And the Canadian economy is actually pretty levered to interest-rate increases. That largely comes from the structure of the mortgage market. If you raise rates and keep them high for, for example, five years – which we’re not suggesting will happen but just as an example — every single mortgage in Canada will reset, and everyone will be paying more. And so that is going to have knock-on effects in terms of consumer spending and stuff like that. And so we think that probably the Bank of Canada is going to have to lower interest rates before a lot of other countries around the world. It might be first. And so we actually like sovereign debt in Canada because you’re getting these higher yields, but you’ve also got the best chance of a price kicker.

And finally, what’s the bottom line on fixed-income investing in 2024?

MH: It can be a great diversifier. And so, when I think about fixed income and advising people to stay invested and have a sleeve of fixed income and have a diversified portfolio, actually, what I look at first is the incredible performance that equities have had. And when you have some stress to that equity part of your portfolio — which may or may not happen, and which we may or may not be able to see — then you want to own fixed income. Now that you’re getting a higher yield, now that yields are away from zero, and you have the possibility of substantial price appreciation should something happen, there are some real reasons to remain invested in fixed income. It’s nuanced. You want to be active. You want to have active fixed-income portfolio management, but definitely it makes a lot of sense to have a sleeve of fixed income in your portfolio.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to Mark Hamlin 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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