Print Transcript
[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today show, TD Asset Management's Alex Gorewicz is going to join us and discuss with the bond market has to say about all this uncertainty around the health of the banking system.
in today's WebBroker education segment, Jason Hnatyk will shows how you can find potential fixed income investments on the platform.
Here's how you can get in touch with us. Email moneytalklive@td.com or below the viewer response box under the video player on WebBroker.
Before we get our guest, let's get you an update on the markets. A continuation of yesterday's rally.
We are up 127 points on the TSX Composite Index, a little more than half percent.
The energy trade is working in our favour for the topline.
The gold trade not as much.
Let's dig in. We will start with some movement to the upside after the quite dramatic pullback in American benchmark crude prices in recent weeks. We are seeing a firming up of the benchmark crude price. 2295, got Cenovus up 3 1/2%. But as some of these concerns ease around the global financial system, at least in the last couple of days, we are seeing a pullback in the price of gold. That is seen in the mining stocks, including Barrett, down a little more than 3%.
South of the border, let's check in on the S&P 500.
A bit of a relief rally continuing.
Janet Yellen, the US Treasury Secretary, had more to say about… Regionals are rallying today.
Up 23 points on the S&P 500.
That's good for a little bit more than half a percent.
The Fed has entered there are two day meeting as well.
Coming out of that on the other side tomorrow at 2 PM Eastern time.
A lot going on. How is the NASDAQ fairing against the broader market?
Just about in-line there, up a little bit more than half a percent as well. Let's check in on one of the big Wall Street banks, Bank of America, getting bid today, it's up more than 3 1/2%. That's a market update.
It's been a volatile ride for markets in recent days.
Investors are navigating concerns about the global financial sector and how the US Federal Reserve is going to react to the stresses that we are seeing in the system, that rate decision coming tomorrow. So what is the fixed income market telling us about the path forward?
Joining us now with her view, Alec Gorewicz, bird flu manager active fixed income at TD Asset Management.
Great to have you.
>> Great to be here.
>> There's a lot going on.
I know you're on top of all of it. Where do you want to begin? What we've been seeing with the regional banks, with the Fed is going to say, the bond market? I will let you take the lead.
>> I wouldn't know where to begin because we've been hit in a number of different ways but probably the first overarching theme that we can draw from the experience over the weekend and really over the last couple weeks is that interest rate hikes that we've seen very aggressively delivered over the past 12 months by all central banks are starting to take effect.
And obviously, they are taking effect probably in places that are catching many of us off guard.
When things start to break, they start to break in places where very few or nobody saw coming.
but we know that financial conditions are tightening, not just in financial markets but in the real economy and that is because of the tightening that we have seen in monetary policy.
Now, what does this mean looking ahead?
Well, this is where now central banks are kind of caught between a rock and a hard place because inflation, although decelerating, as we saw in today's CPI print in Canada that inflation continues to decelerate, it is still elevated.
So what do you do if you are a central bank?
Do you pay attention to the things that are breaking or do you stick to your guns in some way on your inflation targeting mandate and maintain interest rates at these levels?
A lot of unknowns.
>> When you talk about the fact that the aggressive rate hikes we've seen, like we've discussed so many times on the program over the past year or so, are starting to take effect, you said it never takes effect in the way I guess or at least the first area to take effect. We've been talking about all along that as borrowing costs grow higher, household spending is less and the unemployment rate was up a bit and the consumer gets more cautious.
We are not seeing some signs of that but really the financial system stress to begin with.
You talked about the Fed being in a hard place, right, because Powell has to maintain the fight against inflation and try to bring it down but at the same time, he has to show his hand somehow for the financial system stresses.
What is a central bank do now to keep people on a calm path?
>> The question is whose path needs to be calm here?
Let me explain what I mean.
There is no doubt that there were clear governance issues, for example, with SVB that led tolack of proper asset liability management and the mismatches that they had absolutely contributed to their downfall.
But what we do know is that currently, at this level of interest rates, and if they go higher, and when I say interest rates, I mean the policy rates from the Fed, if they go higher, they will continue to put pressure on the entire banking system which is a little bit unintuitive.
Usually, interest rates going higher is a good thing for banks.
But in fact, what's happening now because we are at the end of the cycle or at least that's the perception by the broader fixed income investor base, is that it is forcing depositors to take their money out of banks and put them in money market funds which are very attractive.
They healed well above what deposit rates are being offered by banks.
So the challenge here from Powell's perspective is if you don't hike, then the last 12 months that you've spent anchoring expectations of inflation in the market and with consumers around the 2% target could be stressed, could be challenged.
But then if you do hike, you do possibly exert more pressure on deposits leaving the banking system. So it ends up being, again, a rock and a hard place situation.
Now I guess with all the measures that have been taken by the Fed and by the Treasury, let's say the collective policymakers be, not just in the US, obviously globally, particularly in Switzerland over the weekend around Credit Suisse, all the measures that they've taken should instill financial stability.
Or at least temporarily instill financial stability.
But it doesn't change the fact that core inflation is running at 5 1/2% in the US.
The Fed cannot pause here without creating some concerns that inflation could be stickier in the long run.
>> Let's talk about what the bond market is expecting.
With the Silicon Valley Bank and the Signature Bank stories were evolving, the Credit Suisse headline last week, the bond market expectations for where Fed policy was going to go felt like it was changing by the minute.
It's going to be a height, kind, gentler hike.
What is the bond market saying at this moment since you left your desk about the situation?
>> It's funny.
All the different scenarios you mentioned about what might be expected from the Fed tomorrow, you can find company in any one of those scenarios.
You can find someone who thinks they should cut tomorrow, someone who thinks they should pause tomorrow, someone who thinks they should hike tomorrow.
And the way that I think… The key message from the bond market is less about the constant changing of are they hiking or are they not hiking, and is more the signal being sent around the fact that this is the end of the hiking cycle.
Even if you deliver another rate hike or a few more 25 basis point rate hikes, we are closer to the end then we thought we were even a month ago.
And you can see that from how the bond market reacted to the European Central Bank last week, they raise their interest rate by 25 basis points.
That's very classic behaviour one euro at the end of the hiking cycle.
>> We are probably going to get this question during the show, but that's the context now for people who are waiting for central banks guess the point where they start cutting again, has that timeline being moved forward, pulled forward at all?
>> If you asked the bond market, the answer is yes.
The things that are changing by the minute as you pointed out is when will the first rate cut come? Right now, for both Canada and the US, that first rate cut is expected at some point in college June or July. Softly priced for June.
It's kind of fully price for July. By the summer.
>> By the time I have a tan.
>> And 3 to 4 months from now.
And if you think about the fact that it's still another rate hike or two are expected from the Fed, no more from Canada, that's not very far away and now the real question becomes, are they in a position where they can do that?
I mentioned for example that core inflation is running a 5 1/2%. What about unemployment?
Unemployment is at multi-decade lows. Which is obviously a great thing for the US economy, but the Fed has recently shown, as recently as December, that they thought unemployment would rise a percent this year but they still wouldn't cut interest rates.
So maybe that's the threshold that we should really be looking for.
I think that we are going to get updated economic projections… Tomorrow.
So we are going to get updated economic projections from them but I think that threshold still stands that they are worried, was such a tight labour market, that inflation will come back down to 2% and at the end of the day, they have to see to their mandate and try to use other tools in their toolkit to address financial stability concerns which is what they've demonstrated they are willing to do.
That's just a long-winded way of saying that rate cuts right now that have been priced in over the last week with all of the stresses emerging in the banking system and globally are probably a little bit unwarranted given the economic backdrop.
Now that could change very quickly. But at the moment, it's unlikely that the Fed will cut by the summer.
> Fascinating stuff in a lot going on. We are going to get to your questions about fixed income for Alex Gorewicz and just moments time.
A reminder of course that you in touch with us at any time. Just email moneytalklive@td.
com or fill out the viewer response box under the video player on WebBroker.
Right now, let's get you updated on the top storiesin the world of business and take a look at how the markets are trading. Canadian headline inflation continues to ease coming in at 5.2% in February. While it was the largest deceleration and headline CPI since the early months of the pandemic, households are still feeling the pinch when it comes to grocery prices.
TD Economics says that there is still a way to go to bring inflation down to the Bank of Canada's target range, there is nothing in today's report to move our central bank off its paws on interest rate news.
Shares of First Republic and several other US regional banks are on the rebound today. That after US Treasury Secretary Janet Yellen suggested deposit protection could be sent to other smaller banks to ensure financial system stability.
US regulators recently stepped in to guarantee all deposits at Silicon Valley Bank and Signature Bank following the collapse of these institution. First Republic up more than 39%.
Shares of Tesla or the spotlight today. New retail sales out of China suggest the electric vehicle maker is seeing strong demand that market after cut prices in the fight for market share. The data, which tracks car insurance registrations, is pointing to a strong quarter for Tesla in China this quarter, they are up almost 6% right now. We will check in on the benchmark indices, starting here at home with the TSX Composite Index. We are up 130 points, a little bit more than half a percent.
Some of the energy names getting a bit today is the price of crude stabilizes and south of the border, yes, the fed officials, they are all sitting around the table right now, it's a two day meeting. They come out of the meeting the other side tomorrow afternoon.
Got the S&P 500 continuing yesterday's rally up about 25 points right now or half a percent.
And that's the S&P 500.
We are back with Alex Gorewicz from TD Asset Management, taking your questions about fixed income.
Let's get to them. Here is an interesting one. So many questions last year about the energy stocks. Is it too late to get into bonds given this recent rally we are seeing?
>> a lot of people are being scared onto the sidelines because they are worried that additional rate hikes from central bankswould translate into continued losses in bonds. Rates go higher, prices come down on bonds.
However, he goes back to what I said about the signal that the collective investor base and fixed income is sending to central banks. ECB raised rates 50 basis points, half a percent, and interest rates were lower.
In other words, bond prices move higher.
And the reason for that outcome is because investors are saying, okay, with all the stresses that are building now, rate hikes can continue to be delivered, but we think that's only going to be temporary and very quickly, you're going to have to turn around and cut interest rates.
So bond investors are preempting that pivot, so to speak, from central banks. In fact, interest rates are moving lower and they are likely to continue to do so if economic data starts to turn, and we think it will.
So no really, the question, if you are considering buying bonds or you think you somehow missed this rally, so to speak, over the last couple of weeks, is where do you think central banks will cut rates to? Do you think they will know cut 100 basis points or 200 basis points from current levels?
Or more?
Answer that question and you will see that the opportunity set in bonds still looks attractive. In other words, we are probably it at the early innings of the rally and a lot more is to come.
That could mean over 12 months, 24 months, but the path ahead looks relatively green from our seat.
>> A lot has happened in the past two weeks to change the bond story.
Even heading into this year, a bond investor, even apart from those price moves, was still looking at yields you weren't looking out for a very long time.
>> Yeah, and that's very important to know because it tells you that there is still a risk… There will always be a risk to bonds or to any financial asset. If, for example, we get a new inflationary shock, we saw our experience collectively for 2022, if nothing else, was that inflation moving higher and very quickly moving higher is it bad for all financial assets, bonds included.
So there is absolutely a risk that if we get it inflationary shock, bond prices will go down and interest rates will go back up.
But that income that you're referring to, actually helps to offset quite a bit of the loss, what we call market to market laws or the capital depreciation that you would see if interest rates to move higher.
And so now, in order to lose money, let's say, over the next 12 months, the type of interest rate rise that you would need to see is substantially greater than what we would have seen last year to achieve a similar kind of return.
>> Fascinating stuff. Lots of questions coming in.
Let's get with you more.
Can we get your guest's view on the latest Canadian inflation report and what it means for the Bank of Canada?
>> It reinforces the fact that the Bank of Canada was right to stay on hold.
It came in at 5.2%. The market was expecting 5.4%.
core inflation was also a bit softer than expected.
But long story short,inflation at the moment is actually tracking below with the Bank of Canada was projecting for the first quarter in its most recent monetary policy report.
So again, it has covered to stay on pause. It doesn't need at this time to take further. And we expect the next print, by the way, to be equally… Not necessarily weak but to show equal amounts of deceleration, perhaps even a little stronger than what we saw this month, because of the base effects that we have from February, and March 2022, those numbers were very strong, so the numbers that we are getting now are naturally going to be on a year on year basis slightly weaker.
But I think on the flipside, if we try to have a balanced assessment, the Bank of Canada can pause but not necessarily cut rates when you look at core inflation over the last three months. It's annualized figure is about 3 to 3 and half percent, that's above the Bank of Canada's inflation target which means the right to pause but not ready to cut.
>> Let's take another question now. With everything going on, should we avoid high yield bonds? What do you think of the high yield space in an environment like this?
>> So I think this is where you have to be selective.
In times of stress, there will always be opportunities and that's true of every asset class or every segment of an asset class.
So do you avoid high yield bonds? No, but you have to do your credit research.
You have to understand what company you are buying.
You have to understand what kind of cash flows they are able to generate even in stressed economic environments, and we should expect that eventually we will head into a recession, timing is an unknown but do the work. Figure out which companies can actually sustain a pretty substantial downturn in the economy.
And there are lots of companies that, at the moment, offer very compelling yields that we think can withstand a downturn in the economy.
But is that true of everyone in the high yield space?
No.
So if we think that a top level we would prefer higher quality corporate bonds, investment grade or government bonds over high yield, but even with the high yield space there are still opportunities.
>> Speaking on yesterday's show with Michael Craig, head of asset management at TD, he brought up that high yield isn't just one thing. Not only do you have to do your homework, you have to understand what's in there.
He ran it back to Credit Suisse were some of those bondholders of that special tier of bonds were surprised when it went from $27 billion or value for the portfolio to zero overnight.
>> Yeah, we've been getting this question a lot, specifically what happened with Credit Suisse is additional tier 1 bonds.
Where they stood in the capital structure is very similar where similar types of 81 bonds or recourse capital notes here in Canada that they standardize similar point in the capital structure, but this is where doing the homework actually matters because what you would see if you read the indenture, if you looked at the covenants in these bonds, for the ones that Credit Suisse issued, it specifically said that if a regulator deemed the bank nonviable, they had the discretion to completely write down the value of those bonds.
Where is in Canada, that's not the case. This is where we have to understand that each domestic regulator has had a really big say in terms of how these securities are structured and they are designed to make sure that the taxpayer isn't on the hook for bank failure, that the bondholders and equity holders are going to pay their fair share in the events of massive stress to a bank. But in Canada, you would get equity, you would end up diluting the equity shareholder base rather than being a threat of writing down to zero for these bonds.
>> One more question, not entirely germane to investing, but I got the habit of saying Credit Suisse with an accent. Is it pompous? Should I stop?
>>I don't think that name will survive once the deal goes through.
>> You have solved all my problems in one shot. I don't have to worry about my pronunciation.
As always, make sure you do your own research before making any investment decisions.
we'll get back to your questions for Alex Gorewicz on fixed income in just a moment's time. You can get in touch with us anytime. Email moneytalklive@td.com.
Now, let's get today's educational segment.
If you are looking to research different fixed income opportunities, WebBroker has tools which can help.
Joining us now for more is Jason Hnatyk, Senior client education instructor at TD Direct Investing.
great to see you, as always. If we are interested in fixed income, where should we start in WebBroker?
>> Thanks for having me. It's always a pleasure.
Whether we are looking for exposure to fixed income due to market volatility is or we are looking to capitalize on some of the increasing yields we are seeing due to central bank increases on both sides of the border, WebBroker can help you gain at that exposure.
I will show two different ways to diversify into the fixed income space. Let's jump into the platform and I will show you how.
First of all, if we are looking to invest directly in fixed income themselves, we can accomplish that by clicking on the trading tab at the top of the page and under the buy sell column on the left-hand side, we can see fixed income is third from the bottom.
Take note here, the GICs, guaranteed investment certificates, can be purchased right on the platform as well.
But for fixed income specifically, if we jump into their portal on WebBroker, we can see you have many different options that are available here.
We can be investing in corporate bonds, we can be investing in both Canadian and US bonds and different levels of government debt as well.
We've got Canadian boss, provincial bonds as well is more locally sourced municipal bonds. They are all available for your investment.
We also have the opportunity to look at some of the high yield bonds as was mentioned by your guest as well, so that's available directly through this portal.
If you're looking to find something to meet your specific criteria, there is a search function.
We can access that by clicking this link above the table. This allows you to filter by the different fixed income products that you're interested in but you can also narrow down to maturity dates, specific yields and you can even focus on certain ratings. You are looking for something more junk related or investment grade, you have the opportunity to really focus on what will meet your individual needs.
What's nice about this is you don't have to re-create the wheel.
You can save this search so if you're coming back next week, next month, it's going to be here.
You can see what else is in the inventory, available for you to buy. The second opportunity to get exposure to the fixed income market, outside buying them directly, would be finding a fixed income focused ETF.
We can find those in the platform by going into the research tab at the top the page and under tools, we will go to screeners.
We have been here before, we can screen for stocks, technical events, mutual funds and ETFs.
By choosing the ETFs function, there are some predefined screens at the bottom of the screen but we are going to go ahead and create our own custom screen broadly focused on the bond market.
We are going to choose Canadian funds down at the bottom.
There are Canadian and US currencies available for selection.
The first filter I'm going to put onto the platform is going to be the fund type.
Once we add that criteria and scroll down, in this drop-down menu, we can then find what we want our ETF to be focused on.
We can see Canadian bonds happens to be one of the choices. We can broaden that out and look at some of the international bond funds that are available.
At the bottom of the screen, when you are running an ETF screen, all of your defaults adding mutual funds to the screen so let's narrow that down and remove them from the equation.
Noticing that there is 263 Canadian and international bond funds that we have the ability to buy and sell right now on the platform right away. So let's just go ahead and select the top five that have been identified on the list and give ourselves the opportunity to compare them even closer. We can select on the left and the compare button is just above the list here on the left-hand side as well.
Now we are getting an opportunity to do a side-by-side comparison.
We can see the price performances of the particular funds.
We can see the size of the funds.
We are getting an opportunity to see the fees, the MER's, the management expense ratio and how each particular fund will stack up against each other as well as the yields that you can expect to be receiving from the funds when they are doing their distributions.
Let's take this one step further.
If we found a fun we are looking to buy, we can buy from the top of the page here use the buy sell buttons, but if we are looking to peel back the onion and get more information, by clicking on the name of the fund at the top the page in the list summary button in the pop up at the bottom, we now have the opportunity to get a sense of what's going on in the fund.
It might be self-explanatory with the Canadian bond fund is going to be focused on fixed incomes but if you are looking at other ETF classes this may be useful.
The last thing we will show is if we continue to scroll down on this page, a really understanding what you are getting yourself into.
In this page, you get a sense of what the top 10 holdings are for this ETF. So before you go ahead and commit your money, you know what this fund is going to achieve.
Two different options to get exposure to the fixed income market.
Hopefully one will be right for you.
> Great stuff as always. Thanks.
>> My pleasure.
>> Are things to Jason Hnatyk, senior client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Now before we get back to questions on fixed income for Alex Gorewicz, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back with Alex Gorewicz, taking your questions about fixed income. Lots coming in for you. Let's get to them.
I'm 100% invested in equities. Everything I hear suggests invest in long-term bonds for the next two or 18 months.
Rather than take capital gains, I'm thinking of selling my RRSP equities, 20% of my portfolio, and buying bonds. Good idea?
The caveat here is we can't give you investment advice but I think there's a conversation to be had here about portfolio construction and where you see bonds this year.
>> Yeah, and I think the way I want to take this is to highlight a big difference in terms of what we are seeing in the market now versus what we saw last year without promise saying which way things are going to head.
Although I did mention earlier that we do see positive returns for fixed income in the coming 12 to 18 months,so this is where I agree with the viewer.
whenever interest rate volatility was moving higher, and there are ways that we can assess how investorsthink interest rate volatility will move in the future, we call that implied volatility, and then very similarly, looking at implied volatility for equities, which we usually do by looking at fixed, so whenever interest rate volatility or fixed would move higher last year, it was usually accompanied by interest rates moving higher or yields in bonds moving higher.
this year, we are starting to see the opposite.
Whatever implied volatility is moving higher, you see interest rates moving down.
The big difference there is really the assessment of investors on where we are at the stage of the cycle.
Last year, it was very much expansionary middle of the cycle. This year, it's a classic move of end of cycle.
In other words, investors are bracing themselves that eventually the economy is going to respond by turning lower to all of this monetary policy tightening that we seem to all of his financial instability not just more recently but also the wild financial asset returns that we saw last year.
Negative returns that we saw last year, that all that is going to start having an effect of slowing down the economy and that's usually when interest rates start to fall. So when we think about portfolio construction, last year, government bonds or bonds in general were not going to diversify equities so they all lost money.
This year, in fact, it's going to be the opposite if it turns out that equities move lower because they respond let's a two week earnings for corporations or because the upcoming recession ends up being a more severe one that expected.
Government bonds in particular but in general as well will do well so you start to see that negative correlation between the two asset classes.
>> Alright. That should help you on your path there as you make your own decisions out in viewer land.
Let's take another question. Do you think interest rate cuts her off the table this year?
We talked about this.
I was surprised that the bond market was talking about June and July of this year for cuts.
>> I did mention that I think having a rate cut from the Bank of Canada or the Fed by June or July is too soon but the caveat there is that I don't think that unemployment rises materially over the next 3 to 4 months to warrant that type of policy pivot.
Now, our rate cuts off the table at all this year?
I think the answer here is no, even though I think the next 3 to 4 months are too soon to see a policy pivot.
I think it is possible to see rate cuts from either the Bank of Canada or the Fed or both this year.
But it really depends on what unemployment does. For that, I would say the tightening and lending standards in the banking system, before the stresses emerged in regional banks and then Credit Suisse was taking over, before any of the started to happen, tightening of lending standards was already to a point that would suggest unemployment should rise a couple of points.
So two percentage points higher than where we currently are over the coming months.
And when I say coming months, it could actually be more like coming quarters.
Think of it like 6 to 9 months.
Now obviously, with the recent stresses that have emerged, first and foremost, within banking, you have to assume that lending standards will tighten even further and probably in a very material way in short order. If that's true, the scope for unemployment to rise is actually quite a bit more because whencredit lending tightens,it affects all sections of the economy.
Then you can see broader weakness, which would mean that unemployment could rise pretty quickly. If that happens, I see scope for rate cuts. Absolutely.
>> Let's get to another question now. Can your guest explain, okay, they are testing your knowledge, can your guest explain bond duration and how it relates to term?
>> Okay.
Not a problem.
Let me put on my thinking cap, my educators.
So duration, bare minimum, is considered or is known as the amount of time it takes for you to get your money back in a bond. So let's break down what that means.
When you buy a bond, let's say you buy $400, through a number out there.
Presumably it has coupon on it. So the coupon is the interest that you're going to get semiannually or annually, whatever the agreed-upon frequency is.
And that coupon starts to come in throughout the life of the bond.
By the time you had 100, that means he would've technically recouped all of your initial investment.
Obviously, the coupon is designed to give you additional return.
By the time you hundred in terms of all those coupons you're gonna gather every so often, that is considered getting your money back and that should be, whatever date that is, that should be the duration of the bond.
Now you're going to get more money all the way to the maturity or the full principal payment of the bond, but the notion of duration is when will you get your money back? Term is really just final maturity date, that is when the company or the entity to which you lent money will give you the entire principal back.
So when might that to be equal? When might duration and term be equal? This might clarify the concept. Duration will always be shorter than term if there is a positive coupon. If there is no coupon, if the coupon is 0%, duration and term are the exact same date because whatever you paid out today you will get back at maturity.
>> Fascinating set.
Where were you 10 years ago when I took securities course? I could tap that brain.
We will get back to your questions for Alex Gorewicz on fixed income in a moment.
As always, make sure you do your own research before making any investment decisions.
and a reminder that you can get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Let's do a quick check in on the markets right now. We are continuing the rally that started yesterday.
The TSX Composite Index is up 150 points will call it, the records of a percent.
We are seeing money move back towards financial and also energy names with the price of American crude firming up after some pretty aggressive selling pressure in recent days and weeks.
You've got Crescent Point Energy up 5 1/2%.
I could have chosen any name out of the basket a big energy names today.
The price of gold is pulling back and a lot of minors that are very sensitive to that are seeing some giveback of recent gains. For bucks and $0.91 for B2Gold, that's down about 3 1/4%.
South of the border, the Fed has entered the two day meeting, they come out the other side. It would be interesting to be around that table. Not the person having to make the decision but hearing the conversations about how does the fight against inflation get more complicated with all of the banking stresses we've seen recently. The S&P 500 up 29 points, three quarters of a percent.
The tech heavy NASDAQ, how does it stack up against the broader market?
It's in step, little higher. 79 basis points.
First Republic Bank, let's take a look at this one.
Seeing a lot of the regionals bounced back, perhaps having something to do with US Treasury Secretary Janet Yellen saying that they might extend that deposit security.
First public is up 42% right now.
We are back now with Alex Gorewicz from TD Asset Management, talking fixed income.
We get a lot of questions about GIC rates over the course of the hiking cycle but now that we are at this stage, so wants to know if these GIC rates will still go up.
What influences those rates?
>> The central bank.
If the central bank takes its policy rate higher, that generally influences where the banks will take their own rates and where other issuers like the government of Canada will take its rate.
Or rather, where interest rates take government of Canada bonds.
So I would say the answer here is could they go higher?
Yes, if the Bank of Canada sees a need to raise rates.
But the more likely outcome is no.
>> Okay.
Short and sweet. Let's get another question.
Where on the curve, I'm sure they mean the yield curve, do we want to be in this environment?
>> What normally happens at the beginning of a rate hike cycle from a central bank is that all interest rates across the yield curve, so on the very short and, let's a two-year interest rates all the way out to 30 year interest rates, they tend to move higher.
And at similar clips. They tend to move out 50, 100 basis points, etc.
As the central bank it gets further in that hiking process, longer interest rates failed to keep up with shorter interest rates. They start to leg by pretty significant margins and that's what we call a flattening of the yield curve.
That's the position you want BN as you head into the end of a hiking cycle.
Now, everybody is keen to try to front run the central banks pivot, and they'll want to say, well, that means we are going to undo a lot of this flattening because interest rates will fall but the front-end, so to your interest rates, will fall the most.
That is typically what happens, but only once the central bank starts cutting or right beforethey start cutting. So if you don't think that's imminent or if you don't agree with the bond markets assessment that that first rate cut comes in June or July, right now, it's still probably pays to be towards the longer end of the yield curve, so be invested in longer-term bonds and I would say that's generally the case for 10 to 30 year interest rates.
I would take it one step further and say at this point, with stresses beginning to emerge, with what we've talked about, things are starting to break, those high interest rates that the central banks have set are starting to take effect in the economy, it's a pretty clear signal that interest rates probably need to move lower. In which case, if you are somewhere in what we call the belly of the yield curve at 5 to 10 years, get as much exposure as you can there without worrying about too much world curve you are because it's really about capturing the fall in interest rates rather than the shape of the yield curve.
>> Interesting stuff.
Before I let you go, as a final thought, we have a viewer question, if I haven't invested in bonds yet, have I missed out? Is there more room to run?
>> So it goes back to what I said earlier and it's think about where you expect central banks to cut interest rates once the pivot actually happens.
Even if it several months from now, even if it's at the end of this year, the bond market is going to move well before that.
It already has in some ways.
Interest rates have fallen quite noticeably in the last two weeks as these banking system stresses have emerged.
But they have scope to fall a lot more when you consider that what it would take for central banks to cut interest rates will likely be a recession.
And in a normal recession, central banks had to cut rates by 300 basis points or more. So that has them in price. Interest rates have fallen but not enough to be in line with what we would expect in a typical recession in terms of rate cuts.
So I would say we are in the early innings of a fall in interest rates which means whatever rail you've missed so far, there's probably a lot more to go.
>> Always a pleasure to have you on the program.
I always learn something. We will talk next time.
>> Thanks.
>> Our thanks to Alex Gorewicz, portfolio manager of active fixed and, TD Asset Management. Stay tuned. On Wednesday, Ben Gossack, portfolio manager with TD Asset Management, will be our guest take your questions about global stocks.
And a reminder that you get a head start, just email moneytalklive@td.com.
That's all for our show today, take care!
[music]
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today show, TD Asset Management's Alex Gorewicz is going to join us and discuss with the bond market has to say about all this uncertainty around the health of the banking system.
in today's WebBroker education segment, Jason Hnatyk will shows how you can find potential fixed income investments on the platform.
Here's how you can get in touch with us. Email moneytalklive@td.com or below the viewer response box under the video player on WebBroker.
Before we get our guest, let's get you an update on the markets. A continuation of yesterday's rally.
We are up 127 points on the TSX Composite Index, a little more than half percent.
The energy trade is working in our favour for the topline.
The gold trade not as much.
Let's dig in. We will start with some movement to the upside after the quite dramatic pullback in American benchmark crude prices in recent weeks. We are seeing a firming up of the benchmark crude price. 2295, got Cenovus up 3 1/2%. But as some of these concerns ease around the global financial system, at least in the last couple of days, we are seeing a pullback in the price of gold. That is seen in the mining stocks, including Barrett, down a little more than 3%.
South of the border, let's check in on the S&P 500.
A bit of a relief rally continuing.
Janet Yellen, the US Treasury Secretary, had more to say about… Regionals are rallying today.
Up 23 points on the S&P 500.
That's good for a little bit more than half a percent.
The Fed has entered there are two day meeting as well.
Coming out of that on the other side tomorrow at 2 PM Eastern time.
A lot going on. How is the NASDAQ fairing against the broader market?
Just about in-line there, up a little bit more than half a percent as well. Let's check in on one of the big Wall Street banks, Bank of America, getting bid today, it's up more than 3 1/2%. That's a market update.
It's been a volatile ride for markets in recent days.
Investors are navigating concerns about the global financial sector and how the US Federal Reserve is going to react to the stresses that we are seeing in the system, that rate decision coming tomorrow. So what is the fixed income market telling us about the path forward?
Joining us now with her view, Alec Gorewicz, bird flu manager active fixed income at TD Asset Management.
Great to have you.
>> Great to be here.
>> There's a lot going on.
I know you're on top of all of it. Where do you want to begin? What we've been seeing with the regional banks, with the Fed is going to say, the bond market? I will let you take the lead.
>> I wouldn't know where to begin because we've been hit in a number of different ways but probably the first overarching theme that we can draw from the experience over the weekend and really over the last couple weeks is that interest rate hikes that we've seen very aggressively delivered over the past 12 months by all central banks are starting to take effect.
And obviously, they are taking effect probably in places that are catching many of us off guard.
When things start to break, they start to break in places where very few or nobody saw coming.
but we know that financial conditions are tightening, not just in financial markets but in the real economy and that is because of the tightening that we have seen in monetary policy.
Now, what does this mean looking ahead?
Well, this is where now central banks are kind of caught between a rock and a hard place because inflation, although decelerating, as we saw in today's CPI print in Canada that inflation continues to decelerate, it is still elevated.
So what do you do if you are a central bank?
Do you pay attention to the things that are breaking or do you stick to your guns in some way on your inflation targeting mandate and maintain interest rates at these levels?
A lot of unknowns.
>> When you talk about the fact that the aggressive rate hikes we've seen, like we've discussed so many times on the program over the past year or so, are starting to take effect, you said it never takes effect in the way I guess or at least the first area to take effect. We've been talking about all along that as borrowing costs grow higher, household spending is less and the unemployment rate was up a bit and the consumer gets more cautious.
We are not seeing some signs of that but really the financial system stress to begin with.
You talked about the Fed being in a hard place, right, because Powell has to maintain the fight against inflation and try to bring it down but at the same time, he has to show his hand somehow for the financial system stresses.
What is a central bank do now to keep people on a calm path?
>> The question is whose path needs to be calm here?
Let me explain what I mean.
There is no doubt that there were clear governance issues, for example, with SVB that led tolack of proper asset liability management and the mismatches that they had absolutely contributed to their downfall.
But what we do know is that currently, at this level of interest rates, and if they go higher, and when I say interest rates, I mean the policy rates from the Fed, if they go higher, they will continue to put pressure on the entire banking system which is a little bit unintuitive.
Usually, interest rates going higher is a good thing for banks.
But in fact, what's happening now because we are at the end of the cycle or at least that's the perception by the broader fixed income investor base, is that it is forcing depositors to take their money out of banks and put them in money market funds which are very attractive.
They healed well above what deposit rates are being offered by banks.
So the challenge here from Powell's perspective is if you don't hike, then the last 12 months that you've spent anchoring expectations of inflation in the market and with consumers around the 2% target could be stressed, could be challenged.
But then if you do hike, you do possibly exert more pressure on deposits leaving the banking system. So it ends up being, again, a rock and a hard place situation.
Now I guess with all the measures that have been taken by the Fed and by the Treasury, let's say the collective policymakers be, not just in the US, obviously globally, particularly in Switzerland over the weekend around Credit Suisse, all the measures that they've taken should instill financial stability.
Or at least temporarily instill financial stability.
But it doesn't change the fact that core inflation is running at 5 1/2% in the US.
The Fed cannot pause here without creating some concerns that inflation could be stickier in the long run.
>> Let's talk about what the bond market is expecting.
With the Silicon Valley Bank and the Signature Bank stories were evolving, the Credit Suisse headline last week, the bond market expectations for where Fed policy was going to go felt like it was changing by the minute.
It's going to be a height, kind, gentler hike.
What is the bond market saying at this moment since you left your desk about the situation?
>> It's funny.
All the different scenarios you mentioned about what might be expected from the Fed tomorrow, you can find company in any one of those scenarios.
You can find someone who thinks they should cut tomorrow, someone who thinks they should pause tomorrow, someone who thinks they should hike tomorrow.
And the way that I think… The key message from the bond market is less about the constant changing of are they hiking or are they not hiking, and is more the signal being sent around the fact that this is the end of the hiking cycle.
Even if you deliver another rate hike or a few more 25 basis point rate hikes, we are closer to the end then we thought we were even a month ago.
And you can see that from how the bond market reacted to the European Central Bank last week, they raise their interest rate by 25 basis points.
That's very classic behaviour one euro at the end of the hiking cycle.
>> We are probably going to get this question during the show, but that's the context now for people who are waiting for central banks guess the point where they start cutting again, has that timeline being moved forward, pulled forward at all?
>> If you asked the bond market, the answer is yes.
The things that are changing by the minute as you pointed out is when will the first rate cut come? Right now, for both Canada and the US, that first rate cut is expected at some point in college June or July. Softly priced for June.
It's kind of fully price for July. By the summer.
>> By the time I have a tan.
>> And 3 to 4 months from now.
And if you think about the fact that it's still another rate hike or two are expected from the Fed, no more from Canada, that's not very far away and now the real question becomes, are they in a position where they can do that?
I mentioned for example that core inflation is running a 5 1/2%. What about unemployment?
Unemployment is at multi-decade lows. Which is obviously a great thing for the US economy, but the Fed has recently shown, as recently as December, that they thought unemployment would rise a percent this year but they still wouldn't cut interest rates.
So maybe that's the threshold that we should really be looking for.
I think that we are going to get updated economic projections… Tomorrow.
So we are going to get updated economic projections from them but I think that threshold still stands that they are worried, was such a tight labour market, that inflation will come back down to 2% and at the end of the day, they have to see to their mandate and try to use other tools in their toolkit to address financial stability concerns which is what they've demonstrated they are willing to do.
That's just a long-winded way of saying that rate cuts right now that have been priced in over the last week with all of the stresses emerging in the banking system and globally are probably a little bit unwarranted given the economic backdrop.
Now that could change very quickly. But at the moment, it's unlikely that the Fed will cut by the summer.
> Fascinating stuff in a lot going on. We are going to get to your questions about fixed income for Alex Gorewicz and just moments time.
A reminder of course that you in touch with us at any time. Just email moneytalklive@td.
com or fill out the viewer response box under the video player on WebBroker.
Right now, let's get you updated on the top storiesin the world of business and take a look at how the markets are trading. Canadian headline inflation continues to ease coming in at 5.2% in February. While it was the largest deceleration and headline CPI since the early months of the pandemic, households are still feeling the pinch when it comes to grocery prices.
TD Economics says that there is still a way to go to bring inflation down to the Bank of Canada's target range, there is nothing in today's report to move our central bank off its paws on interest rate news.
Shares of First Republic and several other US regional banks are on the rebound today. That after US Treasury Secretary Janet Yellen suggested deposit protection could be sent to other smaller banks to ensure financial system stability.
US regulators recently stepped in to guarantee all deposits at Silicon Valley Bank and Signature Bank following the collapse of these institution. First Republic up more than 39%.
Shares of Tesla or the spotlight today. New retail sales out of China suggest the electric vehicle maker is seeing strong demand that market after cut prices in the fight for market share. The data, which tracks car insurance registrations, is pointing to a strong quarter for Tesla in China this quarter, they are up almost 6% right now. We will check in on the benchmark indices, starting here at home with the TSX Composite Index. We are up 130 points, a little bit more than half a percent.
Some of the energy names getting a bit today is the price of crude stabilizes and south of the border, yes, the fed officials, they are all sitting around the table right now, it's a two day meeting. They come out of the meeting the other side tomorrow afternoon.
Got the S&P 500 continuing yesterday's rally up about 25 points right now or half a percent.
And that's the S&P 500.
We are back with Alex Gorewicz from TD Asset Management, taking your questions about fixed income.
Let's get to them. Here is an interesting one. So many questions last year about the energy stocks. Is it too late to get into bonds given this recent rally we are seeing?
>> a lot of people are being scared onto the sidelines because they are worried that additional rate hikes from central bankswould translate into continued losses in bonds. Rates go higher, prices come down on bonds.
However, he goes back to what I said about the signal that the collective investor base and fixed income is sending to central banks. ECB raised rates 50 basis points, half a percent, and interest rates were lower.
In other words, bond prices move higher.
And the reason for that outcome is because investors are saying, okay, with all the stresses that are building now, rate hikes can continue to be delivered, but we think that's only going to be temporary and very quickly, you're going to have to turn around and cut interest rates.
So bond investors are preempting that pivot, so to speak, from central banks. In fact, interest rates are moving lower and they are likely to continue to do so if economic data starts to turn, and we think it will.
So no really, the question, if you are considering buying bonds or you think you somehow missed this rally, so to speak, over the last couple of weeks, is where do you think central banks will cut rates to? Do you think they will know cut 100 basis points or 200 basis points from current levels?
Or more?
Answer that question and you will see that the opportunity set in bonds still looks attractive. In other words, we are probably it at the early innings of the rally and a lot more is to come.
That could mean over 12 months, 24 months, but the path ahead looks relatively green from our seat.
>> A lot has happened in the past two weeks to change the bond story.
Even heading into this year, a bond investor, even apart from those price moves, was still looking at yields you weren't looking out for a very long time.
>> Yeah, and that's very important to know because it tells you that there is still a risk… There will always be a risk to bonds or to any financial asset. If, for example, we get a new inflationary shock, we saw our experience collectively for 2022, if nothing else, was that inflation moving higher and very quickly moving higher is it bad for all financial assets, bonds included.
So there is absolutely a risk that if we get it inflationary shock, bond prices will go down and interest rates will go back up.
But that income that you're referring to, actually helps to offset quite a bit of the loss, what we call market to market laws or the capital depreciation that you would see if interest rates to move higher.
And so now, in order to lose money, let's say, over the next 12 months, the type of interest rate rise that you would need to see is substantially greater than what we would have seen last year to achieve a similar kind of return.
>> Fascinating stuff. Lots of questions coming in.
Let's get with you more.
Can we get your guest's view on the latest Canadian inflation report and what it means for the Bank of Canada?
>> It reinforces the fact that the Bank of Canada was right to stay on hold.
It came in at 5.2%. The market was expecting 5.4%.
core inflation was also a bit softer than expected.
But long story short,inflation at the moment is actually tracking below with the Bank of Canada was projecting for the first quarter in its most recent monetary policy report.
So again, it has covered to stay on pause. It doesn't need at this time to take further. And we expect the next print, by the way, to be equally… Not necessarily weak but to show equal amounts of deceleration, perhaps even a little stronger than what we saw this month, because of the base effects that we have from February, and March 2022, those numbers were very strong, so the numbers that we are getting now are naturally going to be on a year on year basis slightly weaker.
But I think on the flipside, if we try to have a balanced assessment, the Bank of Canada can pause but not necessarily cut rates when you look at core inflation over the last three months. It's annualized figure is about 3 to 3 and half percent, that's above the Bank of Canada's inflation target which means the right to pause but not ready to cut.
>> Let's take another question now. With everything going on, should we avoid high yield bonds? What do you think of the high yield space in an environment like this?
>> So I think this is where you have to be selective.
In times of stress, there will always be opportunities and that's true of every asset class or every segment of an asset class.
So do you avoid high yield bonds? No, but you have to do your credit research.
You have to understand what company you are buying.
You have to understand what kind of cash flows they are able to generate even in stressed economic environments, and we should expect that eventually we will head into a recession, timing is an unknown but do the work. Figure out which companies can actually sustain a pretty substantial downturn in the economy.
And there are lots of companies that, at the moment, offer very compelling yields that we think can withstand a downturn in the economy.
But is that true of everyone in the high yield space?
No.
So if we think that a top level we would prefer higher quality corporate bonds, investment grade or government bonds over high yield, but even with the high yield space there are still opportunities.
>> Speaking on yesterday's show with Michael Craig, head of asset management at TD, he brought up that high yield isn't just one thing. Not only do you have to do your homework, you have to understand what's in there.
He ran it back to Credit Suisse were some of those bondholders of that special tier of bonds were surprised when it went from $27 billion or value for the portfolio to zero overnight.
>> Yeah, we've been getting this question a lot, specifically what happened with Credit Suisse is additional tier 1 bonds.
Where they stood in the capital structure is very similar where similar types of 81 bonds or recourse capital notes here in Canada that they standardize similar point in the capital structure, but this is where doing the homework actually matters because what you would see if you read the indenture, if you looked at the covenants in these bonds, for the ones that Credit Suisse issued, it specifically said that if a regulator deemed the bank nonviable, they had the discretion to completely write down the value of those bonds.
Where is in Canada, that's not the case. This is where we have to understand that each domestic regulator has had a really big say in terms of how these securities are structured and they are designed to make sure that the taxpayer isn't on the hook for bank failure, that the bondholders and equity holders are going to pay their fair share in the events of massive stress to a bank. But in Canada, you would get equity, you would end up diluting the equity shareholder base rather than being a threat of writing down to zero for these bonds.
>> One more question, not entirely germane to investing, but I got the habit of saying Credit Suisse with an accent. Is it pompous? Should I stop?
>>I don't think that name will survive once the deal goes through.
>> You have solved all my problems in one shot. I don't have to worry about my pronunciation.
As always, make sure you do your own research before making any investment decisions.
we'll get back to your questions for Alex Gorewicz on fixed income in just a moment's time. You can get in touch with us anytime. Email moneytalklive@td.com.
Now, let's get today's educational segment.
If you are looking to research different fixed income opportunities, WebBroker has tools which can help.
Joining us now for more is Jason Hnatyk, Senior client education instructor at TD Direct Investing.
great to see you, as always. If we are interested in fixed income, where should we start in WebBroker?
>> Thanks for having me. It's always a pleasure.
Whether we are looking for exposure to fixed income due to market volatility is or we are looking to capitalize on some of the increasing yields we are seeing due to central bank increases on both sides of the border, WebBroker can help you gain at that exposure.
I will show two different ways to diversify into the fixed income space. Let's jump into the platform and I will show you how.
First of all, if we are looking to invest directly in fixed income themselves, we can accomplish that by clicking on the trading tab at the top of the page and under the buy sell column on the left-hand side, we can see fixed income is third from the bottom.
Take note here, the GICs, guaranteed investment certificates, can be purchased right on the platform as well.
But for fixed income specifically, if we jump into their portal on WebBroker, we can see you have many different options that are available here.
We can be investing in corporate bonds, we can be investing in both Canadian and US bonds and different levels of government debt as well.
We've got Canadian boss, provincial bonds as well is more locally sourced municipal bonds. They are all available for your investment.
We also have the opportunity to look at some of the high yield bonds as was mentioned by your guest as well, so that's available directly through this portal.
If you're looking to find something to meet your specific criteria, there is a search function.
We can access that by clicking this link above the table. This allows you to filter by the different fixed income products that you're interested in but you can also narrow down to maturity dates, specific yields and you can even focus on certain ratings. You are looking for something more junk related or investment grade, you have the opportunity to really focus on what will meet your individual needs.
What's nice about this is you don't have to re-create the wheel.
You can save this search so if you're coming back next week, next month, it's going to be here.
You can see what else is in the inventory, available for you to buy. The second opportunity to get exposure to the fixed income market, outside buying them directly, would be finding a fixed income focused ETF.
We can find those in the platform by going into the research tab at the top the page and under tools, we will go to screeners.
We have been here before, we can screen for stocks, technical events, mutual funds and ETFs.
By choosing the ETFs function, there are some predefined screens at the bottom of the screen but we are going to go ahead and create our own custom screen broadly focused on the bond market.
We are going to choose Canadian funds down at the bottom.
There are Canadian and US currencies available for selection.
The first filter I'm going to put onto the platform is going to be the fund type.
Once we add that criteria and scroll down, in this drop-down menu, we can then find what we want our ETF to be focused on.
We can see Canadian bonds happens to be one of the choices. We can broaden that out and look at some of the international bond funds that are available.
At the bottom of the screen, when you are running an ETF screen, all of your defaults adding mutual funds to the screen so let's narrow that down and remove them from the equation.
Noticing that there is 263 Canadian and international bond funds that we have the ability to buy and sell right now on the platform right away. So let's just go ahead and select the top five that have been identified on the list and give ourselves the opportunity to compare them even closer. We can select on the left and the compare button is just above the list here on the left-hand side as well.
Now we are getting an opportunity to do a side-by-side comparison.
We can see the price performances of the particular funds.
We can see the size of the funds.
We are getting an opportunity to see the fees, the MER's, the management expense ratio and how each particular fund will stack up against each other as well as the yields that you can expect to be receiving from the funds when they are doing their distributions.
Let's take this one step further.
If we found a fun we are looking to buy, we can buy from the top of the page here use the buy sell buttons, but if we are looking to peel back the onion and get more information, by clicking on the name of the fund at the top the page in the list summary button in the pop up at the bottom, we now have the opportunity to get a sense of what's going on in the fund.
It might be self-explanatory with the Canadian bond fund is going to be focused on fixed incomes but if you are looking at other ETF classes this may be useful.
The last thing we will show is if we continue to scroll down on this page, a really understanding what you are getting yourself into.
In this page, you get a sense of what the top 10 holdings are for this ETF. So before you go ahead and commit your money, you know what this fund is going to achieve.
Two different options to get exposure to the fixed income market.
Hopefully one will be right for you.
> Great stuff as always. Thanks.
>> My pleasure.
>> Are things to Jason Hnatyk, senior client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Now before we get back to questions on fixed income for Alex Gorewicz, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
We are back with Alex Gorewicz, taking your questions about fixed income. Lots coming in for you. Let's get to them.
I'm 100% invested in equities. Everything I hear suggests invest in long-term bonds for the next two or 18 months.
Rather than take capital gains, I'm thinking of selling my RRSP equities, 20% of my portfolio, and buying bonds. Good idea?
The caveat here is we can't give you investment advice but I think there's a conversation to be had here about portfolio construction and where you see bonds this year.
>> Yeah, and I think the way I want to take this is to highlight a big difference in terms of what we are seeing in the market now versus what we saw last year without promise saying which way things are going to head.
Although I did mention earlier that we do see positive returns for fixed income in the coming 12 to 18 months,so this is where I agree with the viewer.
whenever interest rate volatility was moving higher, and there are ways that we can assess how investorsthink interest rate volatility will move in the future, we call that implied volatility, and then very similarly, looking at implied volatility for equities, which we usually do by looking at fixed, so whenever interest rate volatility or fixed would move higher last year, it was usually accompanied by interest rates moving higher or yields in bonds moving higher.
this year, we are starting to see the opposite.
Whatever implied volatility is moving higher, you see interest rates moving down.
The big difference there is really the assessment of investors on where we are at the stage of the cycle.
Last year, it was very much expansionary middle of the cycle. This year, it's a classic move of end of cycle.
In other words, investors are bracing themselves that eventually the economy is going to respond by turning lower to all of this monetary policy tightening that we seem to all of his financial instability not just more recently but also the wild financial asset returns that we saw last year.
Negative returns that we saw last year, that all that is going to start having an effect of slowing down the economy and that's usually when interest rates start to fall. So when we think about portfolio construction, last year, government bonds or bonds in general were not going to diversify equities so they all lost money.
This year, in fact, it's going to be the opposite if it turns out that equities move lower because they respond let's a two week earnings for corporations or because the upcoming recession ends up being a more severe one that expected.
Government bonds in particular but in general as well will do well so you start to see that negative correlation between the two asset classes.
>> Alright. That should help you on your path there as you make your own decisions out in viewer land.
Let's take another question. Do you think interest rate cuts her off the table this year?
We talked about this.
I was surprised that the bond market was talking about June and July of this year for cuts.
>> I did mention that I think having a rate cut from the Bank of Canada or the Fed by June or July is too soon but the caveat there is that I don't think that unemployment rises materially over the next 3 to 4 months to warrant that type of policy pivot.
Now, our rate cuts off the table at all this year?
I think the answer here is no, even though I think the next 3 to 4 months are too soon to see a policy pivot.
I think it is possible to see rate cuts from either the Bank of Canada or the Fed or both this year.
But it really depends on what unemployment does. For that, I would say the tightening and lending standards in the banking system, before the stresses emerged in regional banks and then Credit Suisse was taking over, before any of the started to happen, tightening of lending standards was already to a point that would suggest unemployment should rise a couple of points.
So two percentage points higher than where we currently are over the coming months.
And when I say coming months, it could actually be more like coming quarters.
Think of it like 6 to 9 months.
Now obviously, with the recent stresses that have emerged, first and foremost, within banking, you have to assume that lending standards will tighten even further and probably in a very material way in short order. If that's true, the scope for unemployment to rise is actually quite a bit more because whencredit lending tightens,it affects all sections of the economy.
Then you can see broader weakness, which would mean that unemployment could rise pretty quickly. If that happens, I see scope for rate cuts. Absolutely.
>> Let's get to another question now. Can your guest explain, okay, they are testing your knowledge, can your guest explain bond duration and how it relates to term?
>> Okay.
Not a problem.
Let me put on my thinking cap, my educators.
So duration, bare minimum, is considered or is known as the amount of time it takes for you to get your money back in a bond. So let's break down what that means.
When you buy a bond, let's say you buy $400, through a number out there.
Presumably it has coupon on it. So the coupon is the interest that you're going to get semiannually or annually, whatever the agreed-upon frequency is.
And that coupon starts to come in throughout the life of the bond.
By the time you had 100, that means he would've technically recouped all of your initial investment.
Obviously, the coupon is designed to give you additional return.
By the time you hundred in terms of all those coupons you're gonna gather every so often, that is considered getting your money back and that should be, whatever date that is, that should be the duration of the bond.
Now you're going to get more money all the way to the maturity or the full principal payment of the bond, but the notion of duration is when will you get your money back? Term is really just final maturity date, that is when the company or the entity to which you lent money will give you the entire principal back.
So when might that to be equal? When might duration and term be equal? This might clarify the concept. Duration will always be shorter than term if there is a positive coupon. If there is no coupon, if the coupon is 0%, duration and term are the exact same date because whatever you paid out today you will get back at maturity.
>> Fascinating set.
Where were you 10 years ago when I took securities course? I could tap that brain.
We will get back to your questions for Alex Gorewicz on fixed income in a moment.
As always, make sure you do your own research before making any investment decisions.
and a reminder that you can get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Let's do a quick check in on the markets right now. We are continuing the rally that started yesterday.
The TSX Composite Index is up 150 points will call it, the records of a percent.
We are seeing money move back towards financial and also energy names with the price of American crude firming up after some pretty aggressive selling pressure in recent days and weeks.
You've got Crescent Point Energy up 5 1/2%.
I could have chosen any name out of the basket a big energy names today.
The price of gold is pulling back and a lot of minors that are very sensitive to that are seeing some giveback of recent gains. For bucks and $0.91 for B2Gold, that's down about 3 1/4%.
South of the border, the Fed has entered the two day meeting, they come out the other side. It would be interesting to be around that table. Not the person having to make the decision but hearing the conversations about how does the fight against inflation get more complicated with all of the banking stresses we've seen recently. The S&P 500 up 29 points, three quarters of a percent.
The tech heavy NASDAQ, how does it stack up against the broader market?
It's in step, little higher. 79 basis points.
First Republic Bank, let's take a look at this one.
Seeing a lot of the regionals bounced back, perhaps having something to do with US Treasury Secretary Janet Yellen saying that they might extend that deposit security.
First public is up 42% right now.
We are back now with Alex Gorewicz from TD Asset Management, talking fixed income.
We get a lot of questions about GIC rates over the course of the hiking cycle but now that we are at this stage, so wants to know if these GIC rates will still go up.
What influences those rates?
>> The central bank.
If the central bank takes its policy rate higher, that generally influences where the banks will take their own rates and where other issuers like the government of Canada will take its rate.
Or rather, where interest rates take government of Canada bonds.
So I would say the answer here is could they go higher?
Yes, if the Bank of Canada sees a need to raise rates.
But the more likely outcome is no.
>> Okay.
Short and sweet. Let's get another question.
Where on the curve, I'm sure they mean the yield curve, do we want to be in this environment?
>> What normally happens at the beginning of a rate hike cycle from a central bank is that all interest rates across the yield curve, so on the very short and, let's a two-year interest rates all the way out to 30 year interest rates, they tend to move higher.
And at similar clips. They tend to move out 50, 100 basis points, etc.
As the central bank it gets further in that hiking process, longer interest rates failed to keep up with shorter interest rates. They start to leg by pretty significant margins and that's what we call a flattening of the yield curve.
That's the position you want BN as you head into the end of a hiking cycle.
Now, everybody is keen to try to front run the central banks pivot, and they'll want to say, well, that means we are going to undo a lot of this flattening because interest rates will fall but the front-end, so to your interest rates, will fall the most.
That is typically what happens, but only once the central bank starts cutting or right beforethey start cutting. So if you don't think that's imminent or if you don't agree with the bond markets assessment that that first rate cut comes in June or July, right now, it's still probably pays to be towards the longer end of the yield curve, so be invested in longer-term bonds and I would say that's generally the case for 10 to 30 year interest rates.
I would take it one step further and say at this point, with stresses beginning to emerge, with what we've talked about, things are starting to break, those high interest rates that the central banks have set are starting to take effect in the economy, it's a pretty clear signal that interest rates probably need to move lower. In which case, if you are somewhere in what we call the belly of the yield curve at 5 to 10 years, get as much exposure as you can there without worrying about too much world curve you are because it's really about capturing the fall in interest rates rather than the shape of the yield curve.
>> Interesting stuff.
Before I let you go, as a final thought, we have a viewer question, if I haven't invested in bonds yet, have I missed out? Is there more room to run?
>> So it goes back to what I said earlier and it's think about where you expect central banks to cut interest rates once the pivot actually happens.
Even if it several months from now, even if it's at the end of this year, the bond market is going to move well before that.
It already has in some ways.
Interest rates have fallen quite noticeably in the last two weeks as these banking system stresses have emerged.
But they have scope to fall a lot more when you consider that what it would take for central banks to cut interest rates will likely be a recession.
And in a normal recession, central banks had to cut rates by 300 basis points or more. So that has them in price. Interest rates have fallen but not enough to be in line with what we would expect in a typical recession in terms of rate cuts.
So I would say we are in the early innings of a fall in interest rates which means whatever rail you've missed so far, there's probably a lot more to go.
>> Always a pleasure to have you on the program.
I always learn something. We will talk next time.
>> Thanks.
>> Our thanks to Alex Gorewicz, portfolio manager of active fixed and, TD Asset Management. Stay tuned. On Wednesday, Ben Gossack, portfolio manager with TD Asset Management, will be our guest take your questions about global stocks.
And a reminder that you get a head start, just email moneytalklive@td.com.
That's all for our show today, take care!
[music]
