Portfolio manager says yield on broad Canadian bond market is looking more attractive
Investors can gain value in reassessing their bond portfolio but must be careful of where they take on risk exposure, according to a portfolio manager.
Kathrin Forrest, AVP at Sun Life Global Investments (SLGI), said interest rate risk is arguably more attractive compared to other investment opportunities, while bonds can act as an effective buffer through volatility as they did in February.
Forrest, though, said it was important to understand the different types of risk – from the effects of interest rate hikes to whether an investor opts to take on credit risk.
She said: “As we look at the bond market today – you are certainly getting more compensated for the interest rate risk you are taking on. A year ago, on the broad Canadian bond market, the yield was just under 2% - that’s not even covering your expected inflation over the duration of seven and a half years or so.
“The yield on that same benchmark is now about 60 basis points higher – around 2.60 or so – and that’s maybe looking a little more attractive relative to other investment opportunities.
“So I think there is potentially more value there for people to take a look. I would certainly make sure to carefully assess where the risk is taken – do I want the risk in interest rates where I’m getting more compensated now? Or do I want it in credit where the compensation for the risk is still pretty tight?”
Depending on how aggressive your investment strategy is, bonds will have different roles. Forrest said clarity over what they are supposed to do in your portfolio is vital.
She said: “Is it supposed to give you a really high yield or is it supposed to give you a stabilising effect in your portfolio to protect you from severe market downturns?
“So there are different ways to think about that – if you want stability and diversification from your bond portfolio, you want to make sure you stay on the higher quality side. If you do look for yield, be mindful of the credit risk you may be taking on.”
Overall, Forrest said the prospect of more volatility is not something investors should fear as it creates more opportunities. However, it means you have to be more active and more wary.
She said: “You do need to be more differentiated relative to last year, for example, where essentially it didn’t really matter where you were allocated as you probably had a decent return. I suspect this year will be a bit different – you want to be active, embrace the volatility and be careful where take your risk.”
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