“Central banks are expected to diverge from one another in terms of tightening moves this year,” says John Braive. “But, our overall view of interest rates is there won’t be much movement.”
Braive, vice-chairman of global fixed income at CIBC Asset Management, and manager of the Renaissance Canadian Bond Fund, predicts the U.S. Federal Reserve will be the first to hike interest rates, while the Bank of Canada will likely cut further.
Still, he doesn’t anticipate foreign rates will move much based on the following two factors.
1. Central banks will maintain low interest rates, but there are also more quantitative easing programs being introduced (think of Europe and Japan).
2. “If you look at the buyback programs in Europe and Japan as total supply,” says Braive, “there’s more than enough buying power to take up all of the net new issuance because of deficit[s] in G20 countries. This is a pretty impressive amount of buying. We think that will continue to restrain [an] increase in rates for this year.”
In terms of investment opportunities, he adds, “we’re looking at the government of Canada as a good place to be in terms of a [yield] curve.” He prefers seven- to 10-year bonds and some long-term issues, as well as real return bonds—these pay a rate of return that’s adjusted for inflation, and are primarily issued by the government of Canada.
Braive’s only international exposure is in Mexico and the U.S. “We have an investment in Mexican 10-year bonds. We believe the Mexican government will likely have to cut interest rates sometime this year. Our U.S. positions are in high-yield securities, not in government bonds, because the U.S. [yield] curve is vulnerable to an upshift.”