Richard Usher-Jones of Canso Investment Counsel discusses the bond market currently and the huge interest rate risk for investors
With bond yields at record lows worldwide, it’s an obvious question to ask why anyone would still want to invest their money there at current levels. Richard Usher-Jones, portfolio manager with Canso Investment Counsel explains the reasoning.
“For advisors, clients may be asking why they own bonds,” he says. “Well, they own bonds because they act as an offset to other securities in a diversified portfolio. My advice is not to chase return if it’s not there. That’s when people end up losing a lot of money.”
Aside from that, the bond market still does present value in certain areas, as Usher-Jones elaborates on. “We are buying a lot of floating-rate bonds,” he says. “So you buy a floater at CDOR plus – for example, an AAA rated Royal Bank-covered bond that is CDOR plus 34 basis points. CDOR is 88 basis points, which isn’t that exciting, but when a 10-year Canada bond is below one per cent, it’s much more attractive.”
Yields for government bonds reached a nadir last week, yet many people are not asking when will it improve; rather, they ponder will it fall even further?
“For market yields, I think you have to go back to the 1930s when they were at this level,” says Usher-Jones. “How many years of QE have we had now? Before nobody had even heard of it, but now it’s a regular household term. But if you try to remove that stimulus, nobody knows how the market is going to react.”
Such uncertainty is the bane of any investor, and for those seeking guidance at Canso Investment Counsel, the money managers there will not be directing you towards extending bond term anytime soon.
“For investors, our concern is the amount of interest-rate risk out there today – it’s totally unprecedented,” says Usher-Jones. “The overall bond market has a duration of 7.7 years. You can add yield by extending the term in any portfolio, but our view is it’s just not worth it. You are picking up very little additional yield and assuming an incredible amount of interest-rate risk. “
This position is central to the firm’s investment strategy and meant it has prospered during a period of extreme market volatility. “We do owe some long bonds, but those we selected we think we have protection,” he says. “After Brexit, we would have done better if we had more duration and more term, but going through our portfolios for the quarter we have done very well. We beat all our benchmarks while not assuming that interest rate risk.”
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