The Canadian Fixed Income Market
Matte & Associates Financial Solutions recently hosted an Investment Seminar where we heard from Roshan Thiru of Manulife Investment Management. Roshan, the manager of Manulife’s Canadian Fixed-Income team, spoke directly with our clients during an interactive morning of learning. Clients had the chance to ask questions of a subject matter expert and learn more about the current state and opportunities of the fixed-income market. Our firm is dedicated to giving our clients value, and hosting events like this is one of our favorite ways of fulfilling that commitment. We'll discuss some of the seminar's most important lessons learned in this post.
Roshan Thiru is the head of the Manulife Canadian Fixed-Income Team and a Certified Financial Analyst. His group is responsible for the Money Market and Fixed-Income teams in Toronto and Montreal which manage client portfolios in actively managed Canadian fixed-income strategies. Roshan has held positions as a lead analyst with DBRS, a credit risk manager at RBC Financial Group, and an analyst at Foyston, Gordon & Payne. He has a wealth of knowledge in investment-grade corporate debt instruments as evidenced by his years in the industry.
Under Roshan's direction, his team actively manages Canadian fixed-income strategies such as fixed-income balanced and other mandates with $20 billion in assets under management. His knowledge and extensive investment experience have significantly contributed to the expansion and success of clients’ overall portfolios through exceptional risk adjusted returns. Get to know the team and their investment process:
Bonds: A Returns-Based Math Equation with a Finite End Date
Since bonds reflect a loan that an investor makes to a business or government, they are valued differently than stocks providing a more concrete expected return. A bond's yield, or the interest rate it pays which is decided upon at the time of issue, determines its value. Bond values fluctuate inversely with changes in interest rates. The value of the bond will drop if interest rates rise and vice versa. Unless the unlikely circumstance of a company default occurs, the bond will always return its full principal upon maturity.
Bond investments provide the benefit of allowing a more precise estimation of the portfolio's yield due to their defined end date. The investor can calculate the amount of cash flow they will get over the bond's life because it has a fixed maturity date and interest rate. Compared to equities that don't have a specified maturity date or assured dividend payments, this predictability has an advantage to shorter term investment strategies.
The potential tax advantages of purchasing bonds at a lower face value are an additional benefit. When discounted bonds are redeemed at maturity for face value, capital gains that are taxed at a lower rate than ordinary income are produced. Due to this, purchasing bonds at a discount is a desirable investment strategy for people looking to reduce their tax obligations.
A key Point: Inflationary Pressures Have Subsided
Before: Why Inflation Got Out of Control
A number of variables played a role in the years that preceded the current period of high inflation. First, governments were expanding the amount of money in circulation by printing money quickly. Second, interest rates on loans from central banks were at or very close to zero percent. Thirdly, chartered banks provided lines of credit and long-term mortgage rates below 2%. Fourthly, the COVID-19 lockdowns severely curtailed manufacturing, which drastically reduced the availability of commodities. Finally, the restrictions on immigration made the labor shortages worse. Governments inundated the economy with epidemic stimulus in the sixth place. Last but not least, China's population was expanding and its economy was doing well, which combined to create significant inflationary pressures.
Current Environment: Why Inflation Should Come Down in the Near Future
All of the causes of high inflation rates are currently moving in the opposite direction causing deflationary pressures. Governments are actively reducing the amount of money in circulation, central banks have increased interest rates to levels not seen in more than ten years, and the cost of consumer mortgages and lines of credit has risen. Lockdowns are no longer a barrier to manufacturing, immigration and work permits are returning to normal, epidemic stimulus measures are no longer in effect, and China's population growth is slowing. These variables work together to create deflationary pressure, which is anticipated to lower inflation rates going forward.
What Does Deflation Mean for Fixed Income Investors?
Bond investing represents an opportunity for investors at a time when both inflation and bank interest rates are anticipated to decline. Bond demand rises as inflation rates drop because the value of their fixed interest payments increases. This is due to the fact that as inflation and bank interest rates fall, the high coupon payments become more valuable. This presents an excellent opportunity for active bond managers to increase the return of their overall portfolio. Bond prices typically rise as interest rates decline as well. This is due to the fact that bond yields move in the inverse relationship to interest rates. Bond yields improve as interest rates decline, driving up the price of the securities.
In short bonds represent an excellent opportunity for investors with a shorter time horizon to earn meaningful expected returns while protecting their capital.
THE CANADIAN FIXED-INCOME DIFFERENCE
From the team at Matte & Associates Financial Solutions
Source: Manulife Investment Management