Canadian corporate bonds are a good choice for 2012, due to our current, extended low-interest-rate environment.
“During this period, we’ve positioned a portfolio with a longer duration in the bench mark because our view is that the yield curve has been positively sloped,” says Jeff Waldman, VP of global fixed Income at CIBC Asset Management and manager of the Renaissance Short-Term Income Fund. “The overnight rate is anchored by a very stable bank of Canada policy.”
Lending rates have been at a sustained low for the longest time since the 1950s, Waldman adds, “and this longer duration has added yield to the portfolio because of the positive slope of the yield curve.”
In that context, corporate debt issues generally offer better returns than their government cousins.
“Balance sheets are in good shape,” he says. “Companies that are well known to Canadians – BCE, Telus, Rogers, Enbridge, Shoppers Drug Mart, Highway 407, Vancouver Airport, all those are issues of corporate bonds that we have participated in and many of those we continue to participate in.”
He adds “Companies in Canada have been prudently managing their debt, with resulting debt to equity ratios that are lower on average than companies in the U.S., the UK or the Eurozone.” So these issuers have the risk side is well covered.
These bonds are not just low risk, but offer higher rates than those offered by government bonds.
“You can pick up 1%-to-1.5% on average for good quality investment grade bonds,” says Waldman. That translates into a good, safe return to offset equities.
Waldman notes Canadian bonds offer a steady income stream. “Corporate bonds offer additional yield that’ll help cushion the negative impact of higher interest rate levels down the road,” he says.
On the Bank of Canada side of the equation, he suggests rates will rise if policy makers perceive a too-fast pickup in growth or a need to quell inflation.
“By that time, however, we’ll have shortened the duration of bonds,” says Waldman. “Any bonds clients have in their portfolios will then mature sooner.”
By adjusting the duration of a client’s bonds, their principle will be protected from potential losses caused by rising interest rates.
In a high-interest-rate environment, advisors can also “shift the corporate allocations to higher beta securities that will benefit from an improving economy.”
Read: Corporate bonds come back strong, for more on how bonds performed for investors after the onset of the recession