Bonds performed well over the past 30 years due to elevated interest rates.
But investors now face a different landscape, says John Braive, vice chairman of CIBC Asset Management. He co-manages the Renaissance Real Return Bond Fund, Renaissance High-Yield Bond Fund and Renaissance Canadian Bond Fund.
He adds, “It was 18% back in 1981 on Canadian long-term government bonds. [But] it’s come down decade-by-decade, year-by-year.”
Also, looking back at the 2000-to-2001 period—when the stock market was in a bubble—he says dividend yield on stocks was less than 1%. At that time, the average yield was about 4%.
“You were starting with the lowest dividend yield in history, the highest price-to-dividends, the highest price-to-earnings ratio, the highest price-to-sales ratio, and the most expensive stocks ever,” says Braive.
In today’s environment, he recommends your clients choose corporate and even junk bonds over government bonds. They offer higher returns and more interest.
Additionally, corporate issues provide an extra 1.5%, while junk bonds offer an extra 5.5%, for instance.
“When I look at government bonds, [I see a return of] 6% for 10-year bonds and 2.5% for long-term bonds. You’re not going to get a lot of money in the [Canadian] market,” says Braive.
He adds investors should always evaluate how interest rates will affect returns when buying a security, along with looking at its forecasted performance.