Bond investors shouldn’t be making major portfolio adjustments.
Though the Fed’s QE announcement last month may have them worried, current market volatility isn’t unprecedented, says Patrick O’Toole, vice president of Global Fixed Income at CIBC Asset Management. He co-manages the Renaissance Canadian Bond Fund.
He adds bond yields have risen and fallen many times over the past few years. And when this occurs, it’s important to determine whether the economy is strong enough to support higher bond prices.
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“The bigger-picture strategy we’ve had is to maintain an over-weighting in corporate bonds. The extra yield in corporate bonds remains attractive on a historical basis.” That’s partially because corporate bonds perform better than government bonds as interest rates rise, though they may not initially.
Further, the spikes in the bond market aren’t surprising. “Our call was that we’d see rates get as high as we’ve seen. That was within our expected trading range.”
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And there’s no indication of when the U.S. and Canadian central banks will raise interest rates, he adds. So, investors shouldn’t be looking at adjusting their portfolios “until we get closer to the date when rates start to rise, and that’s a long way off. Investors should stay diversified…and bonds still help to hedge risks on a go-forward basis.”
O’Toole has used sell-offs and higher yields as opportunities to add bonds to portfolios. “We’re close to doing that again, [but] we had expected to see yields get to levels roughly around this high. So we’re getting closer to employing that strategy again.”
In response to questions about bond volatility, O’Toole says “we’ve had sell-offs of bonds like this before. In 2009, we had an increase of about 100 basis points in a three-month time frame. In late 2010, we had about an 80 basis point increase in three-to-four months. This kind of movement is happening now, just in a shorter time frame.”
O’Toole adds, “Fundamentals will again dominate. But the volatility we’ve seen, it happens all the time in the bond market. We can’t get too flustered.” The bottom line is the Fed is trying to wean investors off its support.
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And with this in mind, O’Toole says to hold off selling despite some investors’ rush to the exit. “Our strategy has been to wait for these opportunities for higher yields to add duration, and to stay overweight in corporate bonds.”
He adds, “A better economy is better for corporate bonds, and investors should stay the course. Bonds are historically less volatile than stocks, they provide steady income, and they are still a hedge against [macroeconomic] problems.”