The Advantaged Investor: Fixed Income Market Volatility and a Mid-Year Update (Ep 101)
Head Fixed Income Trader Harvey Libby joins host Chris Cooksey for his regular update visit to review 2024 so far and where we may be heading, including:
- Fixed income market volatility
- Review of the year so far
- Rates/Inflation
- Opportunities
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Transcript
Chris Cooksey: Hello, and welcome to the Advantaged Investor, a Raymond James Ltd. podcast that provides perspective for Canadian investors who want to remain knowledgeable, informed, and focused on long term success. We are recording this on August 15, 2024, I'm Chris Cooksey from the Raymond James Corporate Communications and Marketing Department and today head fixed income trader Harvey Libby returns to the podcast for his regular update visit. Welcome back to the Advantaged Investor Harvey, I really appreciate you taking the time to talk today, and as always, I hope you're doing well.
Harvey Libby: Thanks, Chris. Yes, I am doing really well.
Chris Cooksey: Good to hear. The last time you were on the podcast was in April and we've had a couple of rate cuts in Canada since then, and certainly appears to be on the table in the U.S. as well, so why don't we begin with a recap of where we've been so far in 2024.
Harvey Libby: Well, sure, since the last time we talked, yields have gone down dramatically, probably about 50 basis points. I think in late April, we were around 3.75 on a 5-year Canada. We're now at about 3%, same thing about in 10 year Canada's, we're around 3.75 as well late April and now we are at about I think this morning we were at 3.08. A lot of optimism in the market, a lot of bullish views, a lot of ups and downs. It's been, you know, it's been quite crazy, the volatility in the market. You don't often see this much volatility in fixed income markets, and there's been a lot. You'll have numbers out, whether CPI or PPI, jobless claims, that kind of thing are moving markets by five or 10 basis points in one day, which is big volatility for fixed income markets that are usually pretty stable compared to equity markets or anything else in the world. Just talking about economists, and their expecting rates to go down further, there is a big optimistic push. We had that late last month that at one point we thought there was going to be nine rate cuts by the end of 2025 in the U.S. Right now we're pretty confident. Back to that, we kind of went from nine to eight to nine, and it's kind of fluttering in there in terms of economists views. I personally think that's a little bit too optimistic. How fast can the Fed actually cut? You know, there's just so many times they can actually cut and you'd think they would pause, especially in Canada. Anyways, like in Canada they're calling for like 75 basis points by the end of the year. I’m thinking maybe 50 basis points. They're also calling for by July next year that we'll have about six cuts to our overnight rate, which is currently at 4.53. They think it's going to go at about 3%. That is really good for the average consumer out there who has their mortgage is coming due. So they have to redo that and it's great news for them. It's not great news for investors that are trying to invest for the long term. That's our problem right now. Yields are starting to evaporate and what we've been telling people. and you've helped with that is, you know, invest, get in while the going's good and keep investing.
So we're doing the same kind of thing. Now we're doing the exact same thing, telling people to try to extend gradually into this because rates are, they're definitely going lower. There might be a bumpy ride and you might have 10 bps swings, but the trend is your friend and it's going down. So yields are going down, that's for sure.
Chris Cooksey: Okay. Now inflation, obviously we've seen prints we have seen, it definitely has come down a bit. It doesn't negate the fact it seems to cost $25 for a bag of chips though. What's inflation informing on the markets right now?
Harvey Libby: Inflation is exactly creating optimism in for rates and rates to go downward, so it's definitely fueling the fire. Canada’s last CPI print was at 2.7%. If you go back to the middle of June 2022, we were closer to 8%. It has come down dramatically. In the U.S., the last print was 2.9%, so Canada and the U.S. are pretty close on their CPI numbers. And in June 22, which seems to be the high, they were over 9%. So it has dramatically come down and it seems to be going in that trajectory, which is definitely helping economists predict that rates will go lower.
Chris Cooksey: And that gets back to what you're saying around yields and that sort of thing. Last time you were on, we were saying it's probably going down. This might be the best time to start locking in. But any further comment around rates or is it just really like we like to talk about - the ladder -- when we talk on this show, is that where we're at still?
Harvey Libby: Well, it's still, you know what? It's still very safe. It makes sense for the normal investor, it's the safest way to go, but maybe you want to go instead of a 1 to 5 year ladder, you want to push out a little bit to try to get to 10 years. Most people are more comfortable with a 1 to 5 year ladder. They go to their bank, they see a one to five year GIC. They get offered so they can compare it to something. So the easiest sale right now for our financial advisors or for the last year has been a GIC is yielding X%. Well, a corporate bond is yielding a little bit less, but it's at a discount. So the after tax, the implications are way better in a taxable account. So after tax income is the way to go. And was an easy sell to show that pick up, by buying an after tax or discounted bond compared to a GIC and one to five years, you compare it against a GIC. It's easy to show clients are comfortable with one to five years.
Nobody wants to go like 30 years. Who knows what's going to happen in 30 years, right? But one to five years, it's very safe. And with a one to five year ladder that we keep talking about, the reason is because you do one product each year for five years and every year. A fifth of that comes due or matures, you reinvest in the next rung and in a normal rate environment, the next rung or the next year should be a higher yield than the fifth year out, or sorry, the fourth year out because you're going to be investing in the fifth year. It's just a constant rebalancing or constant reinvesting at. The new rates, which makes total sense for investors.
Chris Cooksey: When it comes to fixed income, the returns are the returns, however, we shouldn't be minimizing the safety aspect of this. It's a section of your portfolio that provides the floor, we could call it.
Harvey Libby: You know what? That is a very good point. The safety aspect of it is very important. We tend to, when rates go to one, two percent, we tend to forget about fixed income and push it to the side and say, we've got this dividend stock that's yielding, you know, 3%. That makes way more sense, but you're taking away the safety aspect of it. This is a sleeve of your portfolio, whether it's 15%, 20%, 30%, 50 percent of your portfolio, you should still be diversified. You still should be in this sleeve and that going forward, it has been the biggest thing. Sorry, going backwards. That has been the biggest thing to try to make sure people were investing still in fixed income at 2 percent because they still should be in something like when rates were at one and two percent people should have been, probably going shorter term, but they still should be in the instrument and it is for the safety.
Chris Cooksey: All right. Well, let's move to opportunities. I think last time you were here, we talked about opportunities within corporates. Is that still the case? Is there still opportunity there or has the market evolved?
Harvey Libby: Corporates are still, in my mind, the sweet spot in the market, something you definitely want to be in investing in, and just because of the pickup and we've got in Canada, especially we've got such high quality corporates, most corporates in Canada, I think it's, I want to say, it's over 60 percent of the corporate bonds in Canada. We have good quality corporate issues, outstanding. So, 1 to 5 years, there's a lot of issuers around. For 1 to 10 years, not so much, because banks don't seem to want to issue bonds that long, there'll be more to the five year area. From five to 10 years, you do have other higher quality names that you can go into. Bell Canadas, Enbridge, CNR, there's a lot of good names. So you look at those, compare those to provincials, compare those to Canadas. If you're risk adverse, I would never buy a corporate, I would always buy a provincial. You know, if you're looking at a tier wise, it goes Canadas, provincials, corporates. Sorry, investment grade corporates and then high yield corporates. Now, high yield corporates, I really, I really, it's not that I don't like them.
It's, they're such an intricate part of the market. I think you're better to buy an ETF or something that, that someone is actually looking at these corporate bonds and make judgment on them, actually look at the balance sheet, people who are way smarter than I'm ever going to be and buy them because it takes a lot of I know how to actually manage high yield. So we stay away from high yield. We'll do the investment grade stuff and we'll show you a product like that. But I think it goes back to whether a corporate makes sense versus a GIC right now. And I don't know if you know this Cooksey, but it flips back and forth, right? So, so GICs are slow to react to the market. You have a Canada bond that reacts to the market in 30 seconds, and if there's numbers out in the market, it reacts in three days. It can give up 30 basis points in yield, it can add 30 basis points in yield. Well, GICs and GIC issuers don't react that fast. They will wait a week, wait two weeks before they start moving their rates. And so there's opportunities if you're looking to invest at that time to buy a GIC. If you're a buy and hold client, you don't care. You're going buy and hold it anyways. If you bought a provincial, a Canada, or a corporate, you know, if a GIC yields better, and you don't need the after tax benefits of it, or if it just yields better, even after tax it yields better, then you should be buying a GIC.
Should be going to your financial advisor, that's what you're paying them for, is to give you advice on, so that they can tell you what the best product for the term you're looking for.
Chris Cooksey: And I guess too, like as you mentioned with high yield, investing throughh a mutual fund or ETF or whatever. Is that is the right choice for you? These managers are also in contact with the companies, so they'll have a deeper view into the market in that regard too, right?
Harvey Libby: A hundred percent, a hundred percent. They're talking to the companies. They've gone through their balance sheets. They've looked at it. They know that if something did happen to the company itself that it's probably worth X on a takeout basis. They're smarter than we are, Cooksey.
Chris Cooksey: That's most people for me, I said it, you didn't have to. Thank you for taking the time today. We'll talk again in the fall for another update enjoy the rest of your summer.
Harvey Libby: Thanks to you too. Take care.
Chris Cooksey: Reach out to us at advantagedinvestorpod@raymondjames.ca. Subscribe through Apple, Spotify, or wherever you get your podcasts. Please contact your advisor with any questions you have. Thank you for taking the time to listen today. Until next time, stay well.
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