Bond market | “Unprecedented in almost 50 years”

For years, bond market investments have been seen as the “safe” counterpart to stock market investments. However, this perception has been shattered in recent months, as both types of investment have collapsed simultaneously.

Martin Vallieres
The Press

The sudden hikes in central bank interest rates to curb the surge in inflation hit the bond market hard.

“Simultaneous relapses in values ​​on the stock market and in the bond markets, this is unheard of in almost 50 years in the financial markets”, notes Sylvain B. Tremblay, vice-president at Optimum Gestion de Placements, which manages 7 billion dollars in bond market investments for institutional investors.

“In fact, what we are currently experiencing, with inflation soaring, is the end of 30 years of monetary policy of lowering interest rates – a favorable period for the valuation of bond markets. – and a precipitous reversal towards a rise in interest rates by the central banks, which depresses values ​​in the bond markets. »

An indicator of the extent of depression in the bond markets?

According to Sylvain Tremblay, the standard portfolio of Canadian bond securities of various durations is down in current value by about 9% since the start of the year.

This drop in value is even more pronounced, around 17%, for a standard portfolio of long-term bonds (10 years and more), which are always more sensitive to changes in central bank interest rates.

On the other hand, this drop in value is less, around 3%, for a typical portfolio of short- and medium-term bond securities (1-3-5 years), which are less affected by changes in interest rate policy. interest of central banks.

“With soaring yields [des taux d’intérêt] of bond securities in the United States across the full spectrum of durations, from short term to long term, the rout of securities and the exodus of investors from the bond markets continues unabated,” observes Hugo Ste-Marie, in portfolio strategy and quantitative analysis at Scotiabank World Markets in Montreal, in a recent notice to its investor clients.

And then ? “Bond investors are keeping an eye on the monthly inflation reports in the United States, as they could inflict more damage on the market value of bonds if inflation continues to be high”, anticipates Hugo Ste- Married.

Where to take refuge?

In the meantime, what advice for retail investors with investments in the bond markets?

“In fact, because the price [valeur marchande] bond securities varies inversely to the evolution of interest rates, an episode of rate hikes by central banks like what is happening these days can lower the value of bond securities at the same time as the value shares on the stock market,” recalls Ruben Antoine.

“Also, you should know that the extent of the variations in the value of bond securities according to the evolution of interest rates depends a lot on their duration before maturity. The value of long-term bonds [10 ans et plus] is usually much more sensitive to key rate changes than short- or medium-term bond securities. »

Consequently, emphasizes Ruben Antoine, “in a balanced portfolio, investments in bond securities or bond funds must be considered like other transferable securities, whose short-term market value may vary upwards or downwards, although usually less pronounced than equities”.

“It is for this reason that investments in bond securities must also be managed and weighted according to the level of risk tolerance of each investor. »

Risk tolerance

Thus, for individuals with very low risk tolerance, and able to deprive themselves of access to this part of their capital for a fixed period, the experts consulted by The Press advise sticking to fixed-maturity bonds sold by governments, or guaranteed certificates of deposit (GICs) issued by financial institutions.

“After years of starving, if not zero, government bonds and fixed-term GICs [non encaissables avant échéance] become attractive again with the rise in interest rates by the central banks in Canada and the United States,” points out David Paré, investment advisor and portfolio manager at Desjardins Wealth Management in Quebec City.

On the other hand, for individual investors with a little more risk tolerance, the relapse in values ​​on the bond securities markets may prove to be an opportunity to buy back at a depressed price.

“Investors who want to recalibrate the fixed-income portion of their portfolio while maintaining flexible access to their capital can take advantage of this unusual episode of a decline in bond market values ​​to buy bond fund shares,” suggests Sylvain B. Tremblay, Vice President at Optimum Investment Management.

Because not only do these bond fund units now offer a current yield in the distribution of interest income at a level not seen for many years, but also their holders will have the possibility of enhancing their yield with value gains from the first indices of a lull in inflation and capping of interest rates by central banks in the United States and Canada.