It’s been a historically bad year for corporate bonds in Canada, but the downturn presents an opportunity for investors, says Ebad Saif, fixed income client portfolio manager with CIBC Asset Management.
Rising interest rates have pushed the yield on the 10-year Government of Canada bond almost 200 basis points higher this year to around 3.3%. This has dragged on absolute performance with returns close to -11% this year, Saif said.
“If the year ended today, that would easily make 2022 the worst performing year for corporate bonds in over 20 years,” he said.
But the volatility has provided “an incredible opportunity” for investors, Saif said, with corporate bonds now offering a higher return potential.
“Not too long ago, the market was concerned about the limited income and return potential of corporate bonds,” he said, but this has changed.
High-quality corporate bonds that were yielding around 2.25% at the start of the year are now offering yields above 5%.
Saif recommends incorporating a mix of both investment-grade and high-yield corporate bonds. “Tactical asset location between investment-grade and high-yield bonds is also a great advantage for investors looking to really harness the additional yields that the securities provide over a market cycle,” he said, though investors with lower risk tolerance may prefer sticking to investment grade.
However, even after this year’s dramatic repricing, there are still risks. Speaking before Wednesday’s 50-basis-point hike from the Bank of Canada, Saif said markets are pricing in 100 to 125 base points through the middle of next year. However, if inflation remains elevated, the central bank could move higher, resulting in a further decline in the bond market.
Investors also need to consider credit risk, he said, if the economy should tip into a recession.
In either scenario, corporate bonds would likely underperform safe haven assets like Government of Canada bonds, Saif said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.