Don’t neglect bonds this year despite tough 2022, experts say

OTTAWA –

Bond portfolios took a beating in 2022 as rates of interest climbed, however specialists say buyers should not neglect bonds this 12 months because the Bank of Canada nears the top of its fee hike cycle.

Christine Tan, assistant vice-president portfolio administration at SLGI Asset Management Inc., mentioned top quality bonds is the place she’s in search of alternative in 2023.

“We really like bonds and where we’re going with bonds is we’re just keeping it simple,” Tan mentioned.

Tan mentioned as a result of she believes Canada is nearer to peak rates of interest than the U.S., her bond allocation is obese Canadian authorities bonds.

And whereas, she mentioned that two or three months in the past, she would have regarded to maintain the bond period quick, she’s now long term bonds.

“As you get closer to the end of a hiking cycle, you can start increasing the duration of the bonds,” she mentioned.

Bonds weighed on buyers’ portfolios in 2022 because the Bank of Canada waged its battle in opposition to decades-high inflation. The value of bonds has an inverse relationship with rates of interest. When charges go up, the worth of bonds in secondary markets goes down.

The Bank of Canada’s key rate of interest goal was 0.25 per cent initially of the 12 months earlier than it raised it seven consecutive occasions, bringing it to 4.25 per cent in December. And whereas the central financial institution hasn’t dominated out additional fee hikes in 2023, it has softened its language and advised extra will increase will rely upon financial knowledge.

Meanwhile, the yield on a Government of Canada five-year bond, a key benchmark which ended 2021 at 1.25 per cent, was almost three per cent on the finish of 2022.

And whereas that improve has pushed up the price of borrowing, highlighted by the upper price of mortgages in Canada, it has additionally meant higher yields for buyers comparable to retirees in search of a gentle supply of revenue.

Stan Wong, a portfolio supervisor at Scotia Wealth Management, mentioned he has his eye on a number of sectors for shares subsequent 12 months together with power and well being care because the economic system faces a attainable recession.

“Health care gives you a very good mix of earnings growth but also some defensive characteristics like a higher dividend profile and just the fact that it’s obviously something that people need, not something that they want,” he mentioned.

“I’ve got a couple of consumer staples names like Krogers and Costco, but I think the alpha is going to come from financials, because I think they’re cheap. Energy should still do well and actually consumer discretionary.”

But, he mentioned, now just isn’t the time to desert bonds simply because that they had a tricky 12 months in 2022.

“Finally, we’re getting some yield,” Wong mentioned of bonds.

And, he mentioned, if central banks pivot subsequent 12 months and starting slicing rates of interest, then bonds can even see capital features.

Tan mentioned 2022 was a very troublesome 12 months for retired purchasers who’re drawing down on their portfolio with even a conservative stability portfolio down 10 to 12 per cent final 12 months.

“Bonds are not sexy but at the same time you don’t want to be taking on too much risk yet because it’s still early in the recession,” she mentioned.