An Update on the IA Wealth Core Bond Pool

In this environment, you've got an attractive coupon, you've got an opportunity for capital gains to increase the total return of your bond portfolio.

What is your view on interest rates?

Yeah, so our team's very bullish on rates. When you look at rates, whether it's in Canada or globally, they're at very attractive levels, close to 15-year highs. And then when you look at our outlook, where are rates going from here, we think they're going lower. And what's behind that opinion is when you look at economic growth, it is slowing. We think it's going to continue to slow. Inflation is coming down. We expect that to continue to come down. That's going to give the green light for central banks to cut rates. This is all bullish for rates. So I think in this environment, you've got an attractive coupon, you've got an opportunity for capital gains to increase the total return of your bond portfolio.

What are the team’s thoughts on yield curve inversion?

Well, when you look at yield curve inversions, they tend to be a good predictor of recessions, but they're not great at predicting the timing of recessions. So for example, when the curve inverted in August of 2019, we had a recession six months later. In contrast, when the curve inverted in February of 2006, it was 23 months before the recession started. So if you look at the average time between a yield curve inversion and recession, it's around 15 months. So right now, we're currently above average, but similar to what we saw in 2006. Looking forward, we do expect the yield curve to steepen as the U.S. Federal Reserve begins cutting rates later this year.

How healthy is the corporate bond market right now?

From our perspective, the corporate bond market remains quite healthy. When you look at quarterly results, they continue to validate credit quality and they're showing no signs of balance sheet stress. When you look at demand, demand for corporate bonds has been solid, and that's been very supportive of corporate spreads. And then looking at corporate spreads, right now, they're on the tighter end of the historical range, but there's still pockets of value there, such as financials. If you look at corporate bonds from an all-in yield perspective, they remain very attractive. And then on a risk-reward basis, we believe the short end of the corporate bond market is the most compelling, given the all-in yield and the shorter duration.

Where is the team finding opportunities?

We take a multi-strategy approach when it comes to adding value within the IA Wealth Core Bond Pool. Some of the key levers we utilize are duration, curve, sector allocation such as government bonds, whether it's federal, provincial or municipal corporate securities, security selection, and then out-of-benchmark positions such as global bonds, as well as currency. We currently have a positive view on duration and overweight position in spread products such as provincial bonds, unrated Quebec municipal bonds, and corporate bonds. In particular, shorter-dated corporate bonds, which we feel offer a very attractive risk-reward proposition. On the currency side, we've got a slight overweight position in the U.S. dollar, which we believe will appreciate versus the Canadian dollar, driven by the interest rate divergences between the two countries.

Why should investors consider a more diversified core bond product?

I think it's important to remember, cash does play an important role in an investor’s portfolio. It has no market risk, it's very liquid. However, there can be an opportunity cost to holding too much cash over a long period of time. In our opinion, the IA Wealth Core Bond Pool offers a very compelling risk-reward perspective. The fund has an attractive yield to maturity, and unlike cash or GICs, the fund can benefit from capital gains should yields move lower. For example, if rates were to move lower by 50 basis points, we could see the fund generate a oneyear gross return of over 8%.

Why should investors consider iA Global Asset Management as a portfolio manager?

I would say it comes down to three things: people, process and performance. Looking at people, iAGAM has over 200 investment professionals. These are strong and experienced teams that share a collaborative spirit, which fosters research and idea generation. We have a robust and disciplined multi-strategy investment style that utilizes several sources of added value. And then finally, in performance, we have a proven long-term track record of consistent added value over time.

Recorded May 21, 2024. For definitions of technical terms, please visit iaclarington.com/glossary and speak with your investment advisor.

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