A Comment -- General Comments From an Expert (A Commentary)

Appropriate to do so. To abandon ship now would undo a lot of the work that they've done. Those expecting rate relief in the near term are going to be disappointed.

Expectations seem to be grounding at 3% now. Inflation is the enemy of bonds, so it's the key driver for the bond markets. For $100 today compounded at 3%, in 10 years it's worth $65.

Inflation isn't going away. The Fed and BOC aren't going to slash rates in March.

He doesn't know, but bond yields, especially the longer-term ones, are too low. If you buy a 10-year bond, you want to be paid, and you're not. Right now, a 10-year Canada bond is around 3.40-3.45%, and inflation's just over 3%. Normally, you get a term premium when you buy a long-term bond, and right now you're not getting one.

In his opinion, long-term bond yields are going to rise in the next few months, and the bonds will fall.

No. Their fiscal situation is far worse than ours. Their debt servicing costs are now bigger than their military budget. They're selling bonds out of the Fed's balance sheet at about $60B a month, and the Chinese and Japanese have been selling  bonds. 

Who's going to buy all these bonds? One of these days there's going to be a bad auction, and bond yields will flip higher. Right now, the market seems to be absorbing the supply fairly well.

We have no evidence yet of any credit issues. Corporate bond spreads are very tight to government bonds, both investment grade and high yield. If there's a recession coming, they haven't told the corporate bond market about it yet. There could be some pain, credit contraction, but so far no evidence of that.

Don't worry, you'll get your money back. There are no secured bonds in the banking sector, so these are really close to the top of the credit pile, though deposit notes rank ahead of them. CIBC is AA-rated, safe, you'll be fine.

Some people have to buy them. Insurance companies, for example, match their liabilities with government long-term assets. The actuaries insist those companies buy them. But the individual investor stays fairly short, unless they're speculating. Bonds are not the place to speculate, save that for stocks.

The bond portfolio is your "sleep at night" money, so you want to keep it safe and short.

The yield curve's inverted, so the best yield you can find is at the 3-year term. In his forecast, he has the yield curve tilting downwards under 5-6 years. You'll get a reasonable return on a short-term investment, without risking a lot. Likes the risk/reward.

Thinks the rates in the 3-6 year timeframe will come down. A lot depends on the BOC. The 5-year yield is very important in Canada. That's where the mortgage rates come from. Banks usually fund themselves with 5-year money to fill up the mortgage market. Though the 5-year yield has risen lately, the longer chart shows that it's actually gone down quite sharply. 

Individual bonds are better than ETFs and mutual funds. The simple reason is that you get your money back, whereas a bond fund never matures. You know what you're going to get paid, and when you'll get your money back. With a fund, you're at the mercy of the market if you need some money. Your income varies. Individual bonds are also cost-effective on fees, you pay the commission just once rather than ongoing management fees. ETFs might be good if you have just a small amount of money, but he buys bonds with as little as $5K.

Favours the ladder approach. Take, say, $100K. Divide it into $20K packets, and buy a bond or GIC for 1, 2, 3, 4 and 5 years. A year from now, the first piece of the ladder matures, while the other rungs are now 1 year shorter. So you buy a 5-year, to keep the ladder intact. You don't risk buying short and having yields fall, or buying long and having yields rise. A way to get relatively attractive yields and returns without risking much principal. Job #1: protecting your principal.
 
Buying a bond at a discount say, $80, and it matures at $100 -- the difference is a capital gain. Depends what province you're in and what your marginal rate is, but the tax appeal is better than owning a full-coupon bond. Strip bonds are all income, but usually held in tax-sheltered accounts, so it's a moot point.

Generally, you want your bonds in a tax-sheltered account. But some people need the income, so that's where the capital gains tax appeal comes in.

Lots of punishment in the bond market. 2022 was the worst year ever, at -12% for the bond index. We've almost had 3 years in a row of negative returns, now we're getting back onto the plus side.

Retail bond market is maybe 5% of the total. Bond market is 100x the size of the stock market. Enormous market for the professionals. 

Investing Basics: Dollar-Cost Averaging vs. Lump Sum Investing

For investors who find themselves with large sums of money looking to deploy into the markets, the strategy of how to best do this is often debated. Investors typically choose between the strategies of dollar cost averaging (DCA) or lump sum (LS) investing. Dollar cost averaging or a ‘constant dollar plan’ entails investing the same amount of money in a specified stock or portfolio of stocks over a given time-period, without giving consideration to future price changes. Comparing this to lump-sum investing, where an investor would deploy the full amount of money available to them immediately into a single stock or portfolio of stocks. 
Unlock Premium - Try 5i Free

1) Will all of the Magnificent 7 stay on top? Likely a few will rotate our and new ones come in. 2) The impact of the Presidential election. 3) The continued impact of the weight-loss drugs. 4) China's slowing economic growth. 5) Mergers and acquisitions return. 6) Interest rates.

Inskip predicted last's August market sell-off, and she points to history which says that the S&P rallies 75% of the time in election years, and during Biden's term that seasonal moves have been stronger than history. She tracks the S&P's moving averages (13-, 26- and 40-week) to track momentum. Currently, all three are positive. There's a floor popping up at 4,750 that the market is now testing (will it hold?). Also, the S&P has made a cup-and-handle and has broken that handle--and could blast higher to new all-time highs. That said, history shows we could consolidate from now till May, meaning the market will go nowhere for 5 months before hitting a summer rally. Be patient--gains are likely to be back-loaded. Another chart shows the S&P equal-weight (SPXEW) with market strength concentrated in the megacaps. The ceiling on SPXEW is $6,321; last week, the market fell below this level, thus suggesting the S&P will be sideways for a while. He expects the next move to be a pullback. Consider the chart of Apple: This year so far Apple has pulled back hard, below its 13- and 26-week averages, which is crucial, though above its 40-week (barely). If it falls lower, it would be bad news, unless it holds above $180 by Friday, whereby Apple is a buying opportunity. She says Apple could go either way, be he still says to own, don't trade, Apple.

Given slightly hotter-than-expected Canadian inflation today, he expects a very choppy quarter. See what happened with U.S. CPI came in slightly higher. We won't see a tidy straight line down, as the bulls expect. Also, he expects Washington to continue spending on the military, healthcare, shelter and renewable energy transition--all this will offset deflationary trends. Definitely, the US is the most expensive market at 18.5x PE. Without the Mag 7, then it's 16.1x PE vs. the world's 12x. Ex-"granola stocks" (i.e. LVMH, GSK, Roche, Loreal, Nestle, AMSL, SAP) then it's 11x PE.

Large caps are trading at a 2 turns premium to their normal historical multiples over the last 20 years, whereas small caps are 5 turns cheaper than their long term multiples. He uses P/E multiples so translated into numbers, 22X forward P/E is usual for small caps and they are at 17X now; large caps are usually at 20X P/E and they are now at 22. This is all based on U.S. data. Also small caps normally trade at a premium multiple to large caps. There are lots of great small cap companies in Canada and many investors are underweight in this type of company.
There were a lot of takeouts in small caps in September/October and there is more to come with the good valuations. A lot of deals can be done for cash and refinanced later if rates go lower. The IPO market is quiet right now but we could see more later