After suffering a sharp devaluation due to the rapid rise in interest rates, has the bond market once again become popular with investors on the lookout for investments with reputedly modest returns in the short term, but safer and more predictable in long term ?
Posted at 6:00 a.m.
Yes, but under certain conditions, indicate investment professionals consulted by The Press as volatility persists in the markets.
“I see the rebounds [des marchés] as an opportunity to make portfolio asset allocation even more defensive, but with a keen eye on bonds that are increasingly attractive,” said Martin Lefebvre, Chief Investment Officer and Financial Markets Strategist at National Bank , in its most recent strategy update.
“For a few years, our client-investors did not want to put their money in GICs [certificats de placement garanti] or bonds at only 2% interest. But here, we see the opposite effect,” reports Marc L’Écuyer, senior portfolio manager at the independent firm Cote 100, during an interview with The Press.
“The bond market has become much more attractive with interest rates rising to around 5% for 10-year bonds from high financial quality issuers. »
But from the point of view of Émilie Croteau, associate advisor in wealth management at Groupe Bernier, which is associated with National Bank Financial, investors remain wary of bond investments.
The perception of the “defensive” nature of bond investments in the portfolio has been shaken up, to say the least, over the past year.
Émilie Croteau, Wealth Management Advisor
“That said, bonds are still very popular among our client-investors. For the time being, we advise them to proceed cautiously and sparingly while waiting for more precise signals of a cap on interest rate hikes from the central banks. »
Central banks
On this subject, moreover, it is difficult to see clearly in a situation of inflation and rising interest rates that even economists in the banking sector are still struggling to define more precisely.
“Inflationary pressures remain strong in the United States,” notes Francis Généreux, senior economist at Desjardins, in a recent economic situation post.
“Some inflationary factors are easing as seen on the goods side. But other inflationary factors, notably in services, remain rooted more deeply in the economy. This makes it even more difficult to challenge the Fed to bring inflation back to its target. [environ 2 % à 3 % par an]. It will therefore have to continue to drastically tighten its monetary policy. »
At the Royal Bank, the economist Claire Fan is also of the opinion that “further interest rate hikes from the Fed will be necessary to fully control inflationary pressures on prices”.
As a result, Claire Fan says she expects “an additional 75 basis point increase [0,75 %] target rate in the Fed’s next monetary policy decision in November. I expect the target range for the U.S. federal funds interest rate [US Fed Funds] reaches 4.5% to 4.75% at the start of 2023.”
Prepare
While waiting for the monetary policies of interest rates to stabilize among the central banks, how to prepare to reinvest in bonds?
At National Bank Financial, advisor Émilie Croteau shares two preferred approaches based on the typical profile of investors.
“Our clientele of wealthier investors is more likely to buy bonds directly at prices and rates that have become more advantageous, and which they intend to keep in their portfolio until their maturity, summarizes Mr.me Croteau.
“For investors with limited means, exchange-traded funds [FNB] and specialized in the bond market are an attractive option for accessing more diversified securities according to investment criteria and objectives. »
At the investment firm Cote 100, Marc L’Écuyer would like to point out the observation of a “fundamental difference” between these two types of investments in the bond market.
Direct investment bonds have a maturity and principal repayment date that is known to investors, who can then select them based on their portfolio “duration” preference.
Marc L’Écuyer, portfolio manager
“In the case of investment funds and ETFs in the bond market, there is no such maturity date, but rather a “rolling” of the bonds in the portfolio according to the average duration target depending on the type management of each fund. »
This non-maturity of bond market funds is reflected in the greater volatility of the value of their shares, depending on the mood of the financial markets and the monetary policy decisions of central banks.
Examples
These days, Marc L’Écuyer says he suggests that Cote 100 clients focus their direct bond investments on two types of long-term securities: bonds with enhanced rates, which are issued by large companies of high financial quality, as well as than bonds issued by major municipalities in Quebec.
“Relatively unknown, but nevertheless very safe, these municipal bonds provide an interest rate premium of around 1.4% over the rate of Canadian government bonds. It’s still an attractive long-term return for a bond investment with a very low level of risk,” says Marc L’Écuyer.