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[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's show, we are going to discuss what's next for the Bank of Canada. They are keeping rates on hold.
They are saying the fight against inflation is not over.
TD Asset Management Hafiz Noordin is going to be our guest. In today's WebBroker education segment, Caitlin Cormier will take us through how to set up a bond ladder using web broker.
Here's how you can get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get to all that and our guest of the day, let's get you an update on the markets.
We will start here at home with the TSX Composite Index. The price of oil is firm and the price of gold is firmer. The TSX Composite Index is up 138 points or more than half a percent.
Baytex energy at $4.34 is up about 3 1/2%.
For the gold-mining stocks, Kinross will represent today.
I could've picked a number out of that big. At $7.27, that stock is a little shy of 3%.
South of the border, Jerome Powell is giving testimony to lawmakers in Washington. He is continuing the mantra of give us more time to get inflation back down and for the high rates to do their work.
That's not rattling the markets all that much. They've heard it before. 43 points to the upside for the S&P 500, good for a gain of almost 1%. After yesterday's selling pressure, particularly in the tech sector, I want to check in on the NASDAQ.
Currently it's a 126 points, just shy of a full percent. Foot Locker gave it its result of a disappointing holiday quarter and a disappointing forecast.
In just one session, there's been a pullback of 29%.
And that's your market update.
The Bank of Canada has held great steady in its latest decision. The BOC Gov. Tiff Macklem says it's too early to even discuss cutting rates just yet.
Joining us now for more is Hafiz Noordin, VP and Dir. for active fixed income portfolio management at TD Asset Management.
Welcome back to the program.
>> It's great to be back.
>> We were not expecting cuts today but we were looking for language.
This is a bank that doesn't want to show us its head. But where are we headed?
>> Rising the market has gone and central banks have not pushed back on is that cuts are coming, it's just when and in what magnitude.
I think from that perspective, we have heard from the BOC today, similar to the side, they leaned toward being patient before starting the cut cycle and they don't want to be in a situation where they cut too early and are stoking another re-acceleration of inflation. That would be the worst outcome from their perspective.
I think they are in a situation where they can stay at this high policy rate. They have guided rates to not hiking more than the current level, we are staying at the 5% level, and we are just letting it work its way through, see more evidence that inflation is indeed sustainably trending back towards 2%.
>> They seem to be concerned with underlying inflation.
They recognize that housing inflation is a big part of this but there are other parts that they are not comfortable with and it's going to be a choppy ride.
This seems to indicate to me that they are pushing us out further and further. The market still feels that by June we will be in a position to cut.
>> Yes, there is housing inflation, but I think one of the concerns they've been highlighting his wage growth.
When we have these persistently tight labour markets, unemployment not really moving up much since last year, that does create these concerns that the stickiness and core inflation, that 3 to 4% area we are seeing, could persist and if wage growth stays in that 45% area, that will make it tougher for inflation to come back to 2%. The flipside though is that in June, the market is pricing in about an 80% chance of a cut in June and that really is based on the idea that inflation can still come down enough that these adjustment cuts can come into play. We are going from 5% to a little bit below 5%, that still well above their neutral level, it's still restrictive monetary policy but those adjustments will start to be made.
>> Can we expect that when they start to move, if it is in June, perhaps you will be seeing huge cuts but they might start to realize now it's time to start bringing back down.
>> Right, and I think that's where the market got ahead of itself early in the year where it was basically pricing and starting at end of Q1 starting to cut and pretty much every meeting after that.
I think with the economic data coming in fairly resilient recently, with the regrowth outlook pretty strong in the labour market strong, the idea would be that the first coat would start and probably see if you cuts after that but I think there has been an acknowledgement that it may not be a very rapid rate cut cycle unless there is some shock. In this base case scenario where growth is staying a little bit above 0% and inflation is gradually coming down, we could see some pauses here and there so that they can make sure that the cuts are not causing inflation to start to rebound, especially knowing that housing has already started to rebound a little bit so I think that's the main thing they have to be careful with.
>> It was a great decision day from the Fed but we did hear from Jerome Powell in his testimony to lawmakers. He basically said, give us some time for this to work its way through. Was there anything interesting there? I feel like he told us what he told us before. And the market said, we now.
>> Yes. Pretty consistently other Fed speakers have been coming out recently, be patient. I think in the US is particularly more notable that growth right now is trending out more like 3% GDP growth so that's above potential GDP growth unlike Canada where we are more in the 0 to 1% area.
So for the US, we will see where the job numbers come out but it's definitely more of a risk that we can see wage growth persisting perhaps even rebounding.
There are, it's a lot more justifiable that the Fed has to be patient. But even for them, at a 5 1/2% policy rate, this idea that some adjustment cuts starting in June is reasonable because momentum and inflation certainly has turned since November and I think that's reasonably reflected in market prices.
>> With the US economy behaving this strongly, performing this robustly, despite having rates at this level, is there an argument to be made that perhaps the neutral rate for the United States is a lot higher than we think it is and perhaps where it is now?
If the economy can perform at rates like this, what's the rationale to cut?
>> We are seeing now that the terminal rate after any amount of cuts are done is not one to 2% anymore or 2 1/2, it's really north of 3% so I think there's still some debate happening in the market aware that lands. The Fed themselves will see at the end of March in the.plot how they are viewing that but there's definitely the idea that the neutral rate is probably three, 3 1/2% and that would mean that bond yields in general, it's a lot more difficult to get to the pre-pandemic levels where they were sub- 2%.
It definitely shows there has been a lot more strength in the growth picture.
A lot less interest rate sensitivity in the US. We know they can terminate their mortgages to 30 years, corporate's have been terming out their debts, so the amount of interest rate sensitivity and vulnerability to higher rates is not as much as it used to be.
I think it's harder in Canada where we have the five year mortgage rates and there is a little more sensitivity there so we could see this divergence into economies persisting.
>> Put it all together, what does it mean for the fixed income market this year?
>> I think the starting point at the beginning of the year was, after a strong rally in bond yields, they are perhaps in a bit more of a range where we are starting to see in terms of Canadian bond yields is the Canadian 10 year bond yield in the range of 3%. We have seen a 25 basis point increase in yields this year just reflecting stronger growth and pushing rate because out a little bit from those aggressive levels that we were seeing.
I think at this point, we are in a bit of a range because it is hard to break down below 3% 10 year yields for Canada unless we see a growth shock and on the flipside it is hard to get meaningfully closer to 4% levels that we saw last year when inflation was still behaving okay.
So it's a range trade and what that means for fixed income investors is that you can still earn a decent level of income with some amount of volatility but the income is really your main driver of return going forward and it's still pretty attractive historically.
>> Interesting stuff in a great start to the program.
We are going to get your questions about fixed income for Hafiz Noordin and just a moment's time.
And a reminder that you can get in touch with us 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 stories in the world of business and take a look at how the markets are trading.
Shares of cyber security firm CrowdStrike in the spotlight today. The Austin, Texas-based company beat expectations for revenue and profit in its most recent quarter and is providing a stronger than exact forecast for this year. It is also buying Flow Security for an undisclosed price as part of its increased M and activity. CrowdStrike is up 13%.
Shares of Foot Locker, we showed you them earlier, significantly under pressure today, right now down a little more than 29%. The athletic apparel retailer heading in disappointing results for the all-important holiday season.
It offered some pretty heavy discounts during the quarter to try to get people into the store, which hit the bottom line.
It's also offering weak sales guidance for this year.
Closer to home, pipeline giant Enbridge says it's going to spend some $500 million US on new projects south of the border.
The money is earmarked for an expansion of its Gray Oak pipeline and storage facilities in Texas and the purchase of two Marine docs, among other projects.
Enbridge, at $47.58, a little more than half a percent.
Quick check in on the markets. Bit of a selloff in the tech sector yesterday.
Oil to the upside, and gold to the upside feeding into those heavyweight sectors in Toronto. We are up almost 100 points, 94 points or half percent on the TSX Composite Index.
South of the border, but of a rebound from yesterday selloff. The S&P 500 of 41 points were a little shy of a full percent.
We are back with Hafiz Noordin taking your questions about fixed income. We have the first one here.
This one has been cropping up and it's an intriguing one. Is there a chance we get no rate cuts this year?
>> It's definitely possible. Right now, about 3 to 4 cuts are priced in. Earlier in the year, it was more like 67 cuts priced in for the Fed and maybe 5 to 6 for Canada. I kind of started to say before that the US maybe there's a bit more of a risk of this persistence and inflation when you got the strong growth levels of call at 3% GDP growth.
And so I think to the extent that that could continue and translate into particularly housing pricing rebounding and rent prices rebounding, that's the biggest component of CPI in the US, we will call it 30 or 40%.
That's really what could be the game changer.
But I think for the most part, we have to follow the data and its shelter and wage growth. If the labour markets are going to stay really tight, it will show up in the wage growth numbers. I think it's really yet to be seen but I think you have to have an investment process that is flexible and nimble and what we have learned over the last couple of years is that what could be priced in by the market earlier in the year can change a lot with the data, so I think for the US, this idea where it may be fewer than three cuts, maybe one or two, could happen but I think in Canada when you look at the broader trends, I think cuts will be a little bit more likely just because there is not as much pressure from an economic growth perspective.
>> I guess the extreme version of that question would be is not only is there no chance doing it rate cuts this year, could we… What conditions would have to exist for central banks, after everything we have been through and clearly indicating that the discussion now is not about hiking anymore, that they would have to hike?
>> I think the distinction would be sticky inflation, so CPI kind of saying around 3%, we just mean we have to keep the policy rate rate is for longer but it's a re-acceleration of inflation through higher wage growth levels or higher rent prices that would perhaps necessitate an evaluation of whether even a 5 1/2% policy rate in the US is enough and so I think that would be the game changer. I think right now, even though we are seeing strong growth, the market prices all that in to his own estimate of inflation expectations and you can use inflation and bonds in the US for that and it's still fairly benign, still expecting around 2% inflation. So nothing right now is really pointing to a strong rebound in inflation but sticky inflation is still here.
>> Another audience question. I believe that this is based on an academic report that came out a few weeks ago. Some reports that there have questioned the value of having bonds in your portfolio, what are your thoughts?
That sort of turns the portfolio management theory on its head.
>> It's been a frustrating experiences or bond investors if your starting point was a couple of years ago when you are evaluating the two year period.
The bigger picture, the point of fixed income really comes down to a couple of main things and one of them is income and the others to provide a level of coupon return in your portfolio and in the second is some amount of diversification versus equity so historically, there has been this kind of negative correlation between particularly government bonds and equities so that if the equity part of your portfolio is going down, you usually see some appreciation in government bonds to help mitigate that downside.
What happened recently and why I think that's motivating some of this analysis is that we have seen a shift in those correlations where it's been more positive correlation so that when equities have been going down, bonds been going down as well.
So obviously a frustrating experience but it happens sometimes. Why? Inflation.
Inflation really can throw off these historical relationships between lots of different asset classes, so if you're worried that inflation could be high for a very long time, then you have to reevaluate this forward-looking correlation between bonds and equities.
But from my perspective, if we are seeing inflation, even though it is sticky and gradually coming down, eventually we will get past this. And get to a more normal, stable inflationary environment. Right now, there is still this uncertainty in the economy.
Once we get past that, I think we will start to see bonds and equities get towards more of that historical relationship where bonds can be more of a shock absorber. It depends on your time horizon. For long-term investors, it's about being patient.
In the meantime, if you are investing in fixed income, you are being paid to wait.
High-quality corporate bonds get you to may be a 45% level of yields and that's way above dividend yields in the S&P 500 which are when 1/2%.
So just about ensuring that your time horizon matches that asset allocation.
>> Intriguing question on that one.
Someone wants to get your thoughts on the emerging markets.
>> Yeah, so they've had a great year in bonds. EM, emerging-market bonds really outperformed last year really on the back of this idea of disinflation. Many emerging markets all inflation rise much more quickly earlier, they were proactive in hiking to very high levels and that inflation started to come down a little earlier compared to what we were seeing in developed markets. We saw social returns last year. But broadly speaking, when you have really strong global risk sentiment, when you have stable to declining US bond yields and when you have stable to declining US dollar, it's still a good asset class but when you look at valuations, they have gone, like many risk assets, valuations have gotten more challenging as a starting point so you really have to look at it on a country by country basis.
Where I would suggest focusing on is high-yielding emerging markets where you're getting a clear boost in income compared to say Canadian bond yields but more investment grade rated emerging markets where their fiscal policy is more stable, where politics are not as much of a risk. Mexico is a good example where they are very geared to the US economy so there growth has been soloed, the reshoring theme has been pretty strong.
That has kept the Mexican peso very stable.
You can go into a tenure Mexican bond and earn 9% yields, that 6% of of Canada, with the currency that's fairly stable. That's one type of opportunity. The other would be something like Indonesia where in Asia right now, broadly, inflation is not very high. So that's also a good prerequisite for bond investing is that inflation is not very volatile in Indonesia, it's maybe 3% right now which is not that bad.
You can get sort of stable levels of income in Indonesia, it 67% bond yields.
Those are the types of opportunities with triple B rated in emerging markets but you get a clear and calm advantage over Canada.
>> The US but, if it accelerates again, is that the biggest risk?
>> That would be the key risk, for sure.
Especially for same Mexico which is very geared to the US, it benefits one the US is doing well but at the same time, it's bond yields can be similar volatility to US bond yields so that would be the key thing to watch for and I think that's where emerging-market investing is very much not just a sit there, buy-and-hold and allocated across all countries. It really has to be country by country and you have a hedging program in place to hide your currency exposure if you start to see a shock.
>> Fascinating stuff.
As always, make sure you do your own research before making any investment decisions.
we are going to get back to your questions for Hafiz Noordin on fixed income in just a moment's time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get to our educational segment of the day.
We are talking fixed income on the show so let's talk about bond laddering, one fixed income strategy that investors may consider. Joining us now to show us how to set up a ladder on WebBroker's Caitlin Cormier, client education instructor with TD Direct Investing.
Let's talk about bond ladder's. Walk us through them.
>> I figured it was an appropriate topic to cover today with all the conversation around interest rate so let's jump into it. What is a bond ladder?
Bond laddering is a fixed investment strategy where investor purchases at multiple bonds with different maturity rates staggered over months or often years. Often times we are looking at different types of bonds, celiac corporate bonds as well as government bonds. The reason why you would do this is around improve predict ability of future income, you know that you have things coming due for the next few years, you know your income is going to look like, it also helps with liquidity. If you have something coming due every year rather than having something locked in for potentially five years if you are planning to hold to maturity, it gives you a bit more liquidity from that perspective. The idea of putting it into all these different types of bonds helps to reduce risks, so we have different types, different ratings of bonds so hopefully having a diversification of yield, a little bit higher yield with some of the corporate bonds versus some of the higher rated government bonds, it's just kind of a smooth stream of income as well as diversification. Those are some of the key reasons why investors who are looking at bonds in their portfolio should maybe consider something like bond laddering as opposed to just purchasing one bond.
>> We understand the bond ladder and how it can be used as an investment strategy.
Let's talk about whether broker and tools to help us create one.
>> Let's get our hands on that.
We are going to hop into a broker right away. We are going to go under research and we are going to go over to fixed income.
This is the portal where we have all of our fixed income products housed.
We are going to do today is choose a couple of different bonds to put together into a hypothetical letter. If you can kind of look here in the main part of my screen, we have quick picks which are a bunch of different types of fixed income products that have different categories of maturity dates. Let's go ahead and look, let's choose a corporate bond that has a maturity date in the next 0 to 5 years. We are going to randomly scroll through here and choose one coming due in 2027 and I'm just going to randomly choose a selection.
We will go US dollar. Sure.
We will choose this General Motors one, just randomly picking it here.
I'm going to check the box beside it, scroll to the top and I'm going to select and I actually have started a ladder here called March so we are just going to added to the portfolio.
We can see I also have two others, so one coming due in 2031, I have two in 2027, not great diversification but that's okay, we will get a couple of more in there.
We will go back to home. I'm going to choose a Canada bond.
Let's go out a little further in time and choose a date we don't have already, maturity dates are here in the middle, we will choose this one right here.
And we will choose to put it in March.
And we will choose one more, we have four, let's go with five.
Let's go with a provincial bond, 5 to 10 years, you will see all the different provinces in Canada and let's choose a 2031, let's go with Newfoundland, why not, and we will add that one to our portfolio.
Now we see a portfolio here are five different bonds with different coupon rates, maturities, pricing. Some of the ratings are similar but not also what we will do first is added a quantity, so how much we would do purchasing of each of these bonds. I'm going to put in 10,000 for now for illustrative purposes.
The next thing we are going to do is we went click calculate and then create ladder report.
Now, it is going to download onto your computer a PDF file. You can see it.
So what we have here, I'll just zoom in a little bit, what we have is a report here that is showing us this proposed fixed income ladder.
We have the different security names here, the prices, the quantity, the market value but what we also have is what our yield to maturity is, so with the total yield for the portfolio is, with the annual yield will be. Our term to maturity, our duration which has to do with changing interest rates, this is the percentage change in price that you can expect on the portfolio if interest rates change by one person. We can also see our total annual income here. We are going to have $2100 of income per year from these bonds.
If we scroll down, we can see more of a report that will show us what months we can effect income, it will show us different asset allocation, meeting with different types of bonds we have. We can see our maturity profile, so when money will be coming to you as well is a credit rating breakdown, so we have a little bit of diversification in credit rating as well. Lots of information to be seen on this type of report, just a way for you to put a few different bonds together and get an expectation of what that would look like if you were to go ahead and purchase them.
>> Great stuff as always, Caitlin. Thanks for that.
>> Thanks, Greg.
>> Caitlin Cormier, client education instructor with 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 you get back your questions about fixed income for Hafiz Noordin, 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.
Okay, we are back with Hafiz Noordin, taking your questions about fixed income.
This one just came in.
Someone wants to know what impact the BOC is going to have on the housing market?
This is a thorny issue for them that they get asked about over and over.
>> Quite a few questions today in the press conference around housing and the struggle is around this idea that keeping rates higher for longer poses a risk to those who have especially variable rate mortgages and the impact that has on their mortgage payments but even for those, when they are coming due in the next couple of years, they will be resetting to these higher rates.
So it's the balance of that and not letting that lead to a crash in the housing market and broader economy versus not cutting too quickly and allowing it inflation broadly to knock him back to 2% properly. I think for Canada and the Bank of Canada it's a tough Needles thread and I think it's really just going to be about monitoring. We did not get a monetary policy report update, we will get one in April, they have been periodically providing updates about how they view mortgage interest cost and how they see this maturity wall within the housing market evolving in the next couple of years.
So I think for now, they are not giving away too much in terms of any sense of concern around the rebound we are seeing in housing activity. There is some amount of it that is seasonal anyways, but at some point, if we see enough price appreciation, that could raise concerns that it will feed into higher rent costs here in Canada.
I think we are still early at that point but it's definitely something that's going to be a tough balancing act for them.
>> I found it interesting to you that after the decision today when they open it up to questions, the first one that came in was about real estate but not residential, it was about commercial.
The only one so far as to say we are going to have a financial review coming up and we have our eye on the commercial real estate space but it's a bit different in Canada and the United States. It was an interesting first question to get thrown out.
>> If anybody wants to point to potential tail risk out there, that the typical one right now because it's caused a lot of volatility in the US small regional banking sector.
For the most part, and we have credit analysts that look at this, they have really done the bottom-up work, they see those headlines we've seen of some banks getting in trouble is fairly idiosyncratic. Furthermore, in Canada, we know our banking sector is a lot more concentrated in large cap banks.
There are always going to be stability reviews around this.
>> I keep hearing about a slowing economy in China. Should I be worried about that and how it could impact the markets?
>> It's always a concern when you have China, which has been driving so much global growth the past couple of decades, at its current stage where it is struggling to boost long-term growth without increasing debt levels. The key issue has been the amount of leverage that's increased in their system and found its way into the property markets.
So we are seeing this unwinding of that leveraged property. But I would say from a market perspective is that a lot of the adjustment down in China's asset prices has already happened. When you look at Chinese equity prices, a fair amount of bad sentiment is already there so the starting point is not, is relatively more attractive. It's hard to see where it goes, but the channel it matters more for the Canadian economy is probably commodities because when we think of how does China's demand affect us it's really through… >> Copper, oil.
>> Exactly. I think from that perspective, again, commodities have largely discounted some of this decline in demand but we know that they are still targeting 5% growth.
That's what they are trying to achieve going forward.
So I think we just have to keep watching.
Does their ability, from a policy perspective, to manage lower growth, does not come into question and cause a step change down and commodities? That's what would impact the Canadian economy. I think for now, low growth, lower-than-expected growth in China is kind of baked into a lot of forecasts.
>> Another question now, a viewer is wondering about the current inverted yield curve and assuming an investment horizon greater than five years, does it make sense to invest solely in the front end and role of maturity? We cannot give investment advice on the platform.
What does the inverted yield curve mean for investors?
>> What's important to remember is that the normal yield curve is upward sloping.
Let's say you've got a five-year bond at 3% and laissez-faire round numbers your for your government bond is yielding 2%.
Normally when you bind that five-year bond, you get an income level, a bond of about 3% but a year later you will get a bit of price appreciation because the yield of that bond will go from 3% to 2% and we know that in bond math, when yields go down, the price of the bond goes up so you get that role down effect.
What's happening now though is with C inverted yield curve, the world on effect is been negative. There really isn't much of an opportunity to try to capture bond appreciation purely just from bonds going from five years to four years. If anything, there's a small amount of bond depreciation.
All of that is to say that in this environment you are focus more on the outright level of income.
That sort of the main driver of total return going forward, the amount of income.
And beyond that, it's more that if you are investing out the curve, the evolution of bond yields coming down with inflation hopefully coming down as well, that's what would drive more of the price effective your bonds, not so much how it rolls along the curve.
>> Very interesting stuff. We are going to get back your questions for Hafiz Noordin on fixed income in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
and a reminder that you 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.
Okay, let's get you updated on the markets and take a look at TD's Advanced Dashboard, a PlatForm designed for active traders available through TD Direct Investing. We are going to jump into the heat map function, it gives you a view of the market movers. We will start with the TSX 60 by Price and volume. The price of American benchmark route is a little more than 2%.
Gold continues to push to new highs, $2153 on my screen right now. How is applying out? A bit more firmly among the mining stocks. Kinross Gold a little more than 3%, Barrick up about 2%.
Some movement with big oil and gas names, nothing too dramatic. Suncor is a 1%, CVE, Cenovus, up about 1 1/3. South of the border, Jerome Powell telling us what we have been hearing from him for a while, they are not ready to cut radio. The market taking it all in, putting a bit more money into the tax base. Yesterday's selloff was heavily tech centred.
Nvidia is a 3 1/2, AMD a little more than three, Intel up to the tune of 5%. Some strength in some of those big tech names.
You can get more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We are back with Hafiz Noordin from TD Asset Management talking fixed income.
Someone wants to review on corporate bonds.
>> Corporate bonds had a great end to 2023, have continued to outperform government bonds this year with a higher level of income. I think what you generally have to think about is what are the fundamentals and credit saying and what that means is is economic growth looking solid? Yes.
Our earnings growth following along with that? Yes, we are seeing pretty good fundamentals there.
And consumption, all of that is based on pretty solid consumption, particularly in the US and developed markets broadly. From that perspective, corporate bonds make a lot of sense in terms of having an overweight versus government bonds.
Getting about 100 basis points of incremental yield if you are in US investment grade bonds. In Canada, it's a bit higher, you get about 130 basis points on average of incremental income. So I think the main risk though it is the starting point for evaluations, we have seen credit spreads coming down quite a bit. In the US, it's about call at 10 to 15 percentile that 100 basis points of incremental spread is at the lower end of the range historically but in Canada it's a bit more attractive. At 130 basis points, that's around the average level historically.
So I think it's really just about knowing where in the global investment grade market to invest and relate Canadian investment grade bonds right now and the only other consideration is knowing that spreads have come in a lot. It's good to have part of your portfolio and liquid government bonds as well to take advantage, if we see some unknown shock work its way through the market and we see wider corporate bonds. I think just about having the balance to get the higher income but make sure that you are ready to have room to buy more corporate bonds in your portfolio if we see better valuation.
>> That's investment grade corporate, what about high-yield?
>> Similar narrative around fundamentals in terms of earnings growth all looking pretty good. High-yield corporate bonds, you have to remember, are always fairly correlated with equities. On the long run, the return is about 60% correlated with equities so it moves with broader risk markets.
I think when you look at all in yields in high-yield, it's still a good story. The high-yield index yields about 8%.
Historically, the average is about 6 1/2.
So when many investors look at high-yield, they will see those yields and will allocate capital purely based on the all in yield. When you look underneath, most of that or a larger part of that higher yields coming from government bonds, so high-yield bonds like any government bond is a government bond plus spread.
High-yield debt spread is about 300 basis points now and the long-term average is closer to a little higher than 400 basis points.
They are a bit rich from a spread perspective but given the strength of fundamentals in the economy, they are worth an allocation and is just about ensuring that you are checking out the issuers, the corporate site could be downgraded.
>> April 16, the budget is coming up next month.
Anything you will be watching for?
>> I think from Canada the big concern but I think long-term is really about how do we ensure that our potential GDP growth is boosted from where we are now? Because I think productivity has been an issue in Canada and so what I mean by that is what we are looking for is how do we ensure increasing the productive capacity in the economy, housing is one area for sure, we talked about that a lot today, how is the supply of housing meeting the higher population growth that we have seen in Canada so I think that that's a critical area that they will need to address. I see beyond that it's the other parts of the economy where we need to see investments in productive capacity and ensuring that our economy is… >> It should be producing.
>> Yes. We see in the US is very dynamic.
The whole AI theme, there's a lot of innovation embedded in their economy.
We need to make sure we are moving in the same direction.
I think is the bigger picture things. We also look at their issuance. Based on their borrowing needs, where are they issuing in the government bond market because that can cause volatility in certain parts of the yield curve.
I think with very topical right now is that 30 Year Government Bonds in Canada are quite low compared to 10 year government bonds. It sort of negative inverted curve there so 30 year bond yields are about 10 basis points lower than 10 year yields and most other markets globally it's the other way around. You have higher 30 year yields than the tenure.
What that means is that is potentially an opportunity for the government to issue more in the 30 year because they can get lower borrowing costs. If we see things going in that direction, it would certainly impact how we are thinking of our curve exposure in a fixed income portfolio and avoiding 30 year bonds and favouring shorter bond so those are things we have to watch for as well in the budget.
>> Interesting stuff. We are out of time for questions. Before I let you go, I want to round back to the top of the discussion. The BOC has said the fight against inflation is not over. Where does that leave us?
>> Unfortunately for a lot of people who wanted answers, it is still wait-and-see mode. We have to keep watching the data.
Watch the hard data that's coming out, inflation data, jobs numbers.
It's really important as well to look at forward-looking indicators for inflation growth to get a better picture of with an assumption of rate cuts priced in, what will that do to growth and inflation going forward?
Is it sustainable or not?
I think in the meantime, from an investment perspective, there is are still strong opportunities to earn high levels of income in government bonds and high-quality corporate bond so I don't think anything right now is changing the strategy.
But making sure that you got liquidity in your portfolio and be ready to act if the data changes the narrative.
>> Always fascinating having you here.
Really enjoyed the conversation. Look forward to the next one.
>> Thanks very much.
>> Thanks to Hafiz Noordin, VP and Dir., active fixed income portfolio management at TD Asset Management.
As always, make sure you do your own research before making any investment decisions.
stay tuned for tomorrow show. Jared Abluss, VP of portfolio research at TD Asset Management will be our guest taking your questions about healthcare stocks.
You can get a head start on this question.
Just email moneytalklive@td.com. That's all the time you have the show today.
Thanks for watching. We will see you tomorrow.
[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's show, we are going to discuss what's next for the Bank of Canada. They are keeping rates on hold.
They are saying the fight against inflation is not over.
TD Asset Management Hafiz Noordin is going to be our guest. In today's WebBroker education segment, Caitlin Cormier will take us through how to set up a bond ladder using web broker.
Here's how you can get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get to all that and our guest of the day, let's get you an update on the markets.
We will start here at home with the TSX Composite Index. The price of oil is firm and the price of gold is firmer. The TSX Composite Index is up 138 points or more than half a percent.
Baytex energy at $4.34 is up about 3 1/2%.
For the gold-mining stocks, Kinross will represent today.
I could've picked a number out of that big. At $7.27, that stock is a little shy of 3%.
South of the border, Jerome Powell is giving testimony to lawmakers in Washington. He is continuing the mantra of give us more time to get inflation back down and for the high rates to do their work.
That's not rattling the markets all that much. They've heard it before. 43 points to the upside for the S&P 500, good for a gain of almost 1%. After yesterday's selling pressure, particularly in the tech sector, I want to check in on the NASDAQ.
Currently it's a 126 points, just shy of a full percent. Foot Locker gave it its result of a disappointing holiday quarter and a disappointing forecast.
In just one session, there's been a pullback of 29%.
And that's your market update.
The Bank of Canada has held great steady in its latest decision. The BOC Gov. Tiff Macklem says it's too early to even discuss cutting rates just yet.
Joining us now for more is Hafiz Noordin, VP and Dir. for active fixed income portfolio management at TD Asset Management.
Welcome back to the program.
>> It's great to be back.
>> We were not expecting cuts today but we were looking for language.
This is a bank that doesn't want to show us its head. But where are we headed?
>> Rising the market has gone and central banks have not pushed back on is that cuts are coming, it's just when and in what magnitude.
I think from that perspective, we have heard from the BOC today, similar to the side, they leaned toward being patient before starting the cut cycle and they don't want to be in a situation where they cut too early and are stoking another re-acceleration of inflation. That would be the worst outcome from their perspective.
I think they are in a situation where they can stay at this high policy rate. They have guided rates to not hiking more than the current level, we are staying at the 5% level, and we are just letting it work its way through, see more evidence that inflation is indeed sustainably trending back towards 2%.
>> They seem to be concerned with underlying inflation.
They recognize that housing inflation is a big part of this but there are other parts that they are not comfortable with and it's going to be a choppy ride.
This seems to indicate to me that they are pushing us out further and further. The market still feels that by June we will be in a position to cut.
>> Yes, there is housing inflation, but I think one of the concerns they've been highlighting his wage growth.
When we have these persistently tight labour markets, unemployment not really moving up much since last year, that does create these concerns that the stickiness and core inflation, that 3 to 4% area we are seeing, could persist and if wage growth stays in that 45% area, that will make it tougher for inflation to come back to 2%. The flipside though is that in June, the market is pricing in about an 80% chance of a cut in June and that really is based on the idea that inflation can still come down enough that these adjustment cuts can come into play. We are going from 5% to a little bit below 5%, that still well above their neutral level, it's still restrictive monetary policy but those adjustments will start to be made.
>> Can we expect that when they start to move, if it is in June, perhaps you will be seeing huge cuts but they might start to realize now it's time to start bringing back down.
>> Right, and I think that's where the market got ahead of itself early in the year where it was basically pricing and starting at end of Q1 starting to cut and pretty much every meeting after that.
I think with the economic data coming in fairly resilient recently, with the regrowth outlook pretty strong in the labour market strong, the idea would be that the first coat would start and probably see if you cuts after that but I think there has been an acknowledgement that it may not be a very rapid rate cut cycle unless there is some shock. In this base case scenario where growth is staying a little bit above 0% and inflation is gradually coming down, we could see some pauses here and there so that they can make sure that the cuts are not causing inflation to start to rebound, especially knowing that housing has already started to rebound a little bit so I think that's the main thing they have to be careful with.
>> It was a great decision day from the Fed but we did hear from Jerome Powell in his testimony to lawmakers. He basically said, give us some time for this to work its way through. Was there anything interesting there? I feel like he told us what he told us before. And the market said, we now.
>> Yes. Pretty consistently other Fed speakers have been coming out recently, be patient. I think in the US is particularly more notable that growth right now is trending out more like 3% GDP growth so that's above potential GDP growth unlike Canada where we are more in the 0 to 1% area.
So for the US, we will see where the job numbers come out but it's definitely more of a risk that we can see wage growth persisting perhaps even rebounding.
There are, it's a lot more justifiable that the Fed has to be patient. But even for them, at a 5 1/2% policy rate, this idea that some adjustment cuts starting in June is reasonable because momentum and inflation certainly has turned since November and I think that's reasonably reflected in market prices.
>> With the US economy behaving this strongly, performing this robustly, despite having rates at this level, is there an argument to be made that perhaps the neutral rate for the United States is a lot higher than we think it is and perhaps where it is now?
If the economy can perform at rates like this, what's the rationale to cut?
>> We are seeing now that the terminal rate after any amount of cuts are done is not one to 2% anymore or 2 1/2, it's really north of 3% so I think there's still some debate happening in the market aware that lands. The Fed themselves will see at the end of March in the.plot how they are viewing that but there's definitely the idea that the neutral rate is probably three, 3 1/2% and that would mean that bond yields in general, it's a lot more difficult to get to the pre-pandemic levels where they were sub- 2%.
It definitely shows there has been a lot more strength in the growth picture.
A lot less interest rate sensitivity in the US. We know they can terminate their mortgages to 30 years, corporate's have been terming out their debts, so the amount of interest rate sensitivity and vulnerability to higher rates is not as much as it used to be.
I think it's harder in Canada where we have the five year mortgage rates and there is a little more sensitivity there so we could see this divergence into economies persisting.
>> Put it all together, what does it mean for the fixed income market this year?
>> I think the starting point at the beginning of the year was, after a strong rally in bond yields, they are perhaps in a bit more of a range where we are starting to see in terms of Canadian bond yields is the Canadian 10 year bond yield in the range of 3%. We have seen a 25 basis point increase in yields this year just reflecting stronger growth and pushing rate because out a little bit from those aggressive levels that we were seeing.
I think at this point, we are in a bit of a range because it is hard to break down below 3% 10 year yields for Canada unless we see a growth shock and on the flipside it is hard to get meaningfully closer to 4% levels that we saw last year when inflation was still behaving okay.
So it's a range trade and what that means for fixed income investors is that you can still earn a decent level of income with some amount of volatility but the income is really your main driver of return going forward and it's still pretty attractive historically.
>> Interesting stuff in a great start to the program.
We are going to get your questions about fixed income for Hafiz Noordin and just a moment's time.
And a reminder that you can get in touch with us 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 stories in the world of business and take a look at how the markets are trading.
Shares of cyber security firm CrowdStrike in the spotlight today. The Austin, Texas-based company beat expectations for revenue and profit in its most recent quarter and is providing a stronger than exact forecast for this year. It is also buying Flow Security for an undisclosed price as part of its increased M and activity. CrowdStrike is up 13%.
Shares of Foot Locker, we showed you them earlier, significantly under pressure today, right now down a little more than 29%. The athletic apparel retailer heading in disappointing results for the all-important holiday season.
It offered some pretty heavy discounts during the quarter to try to get people into the store, which hit the bottom line.
It's also offering weak sales guidance for this year.
Closer to home, pipeline giant Enbridge says it's going to spend some $500 million US on new projects south of the border.
The money is earmarked for an expansion of its Gray Oak pipeline and storage facilities in Texas and the purchase of two Marine docs, among other projects.
Enbridge, at $47.58, a little more than half a percent.
Quick check in on the markets. Bit of a selloff in the tech sector yesterday.
Oil to the upside, and gold to the upside feeding into those heavyweight sectors in Toronto. We are up almost 100 points, 94 points or half percent on the TSX Composite Index.
South of the border, but of a rebound from yesterday selloff. The S&P 500 of 41 points were a little shy of a full percent.
We are back with Hafiz Noordin taking your questions about fixed income. We have the first one here.
This one has been cropping up and it's an intriguing one. Is there a chance we get no rate cuts this year?
>> It's definitely possible. Right now, about 3 to 4 cuts are priced in. Earlier in the year, it was more like 67 cuts priced in for the Fed and maybe 5 to 6 for Canada. I kind of started to say before that the US maybe there's a bit more of a risk of this persistence and inflation when you got the strong growth levels of call at 3% GDP growth.
And so I think to the extent that that could continue and translate into particularly housing pricing rebounding and rent prices rebounding, that's the biggest component of CPI in the US, we will call it 30 or 40%.
That's really what could be the game changer.
But I think for the most part, we have to follow the data and its shelter and wage growth. If the labour markets are going to stay really tight, it will show up in the wage growth numbers. I think it's really yet to be seen but I think you have to have an investment process that is flexible and nimble and what we have learned over the last couple of years is that what could be priced in by the market earlier in the year can change a lot with the data, so I think for the US, this idea where it may be fewer than three cuts, maybe one or two, could happen but I think in Canada when you look at the broader trends, I think cuts will be a little bit more likely just because there is not as much pressure from an economic growth perspective.
>> I guess the extreme version of that question would be is not only is there no chance doing it rate cuts this year, could we… What conditions would have to exist for central banks, after everything we have been through and clearly indicating that the discussion now is not about hiking anymore, that they would have to hike?
>> I think the distinction would be sticky inflation, so CPI kind of saying around 3%, we just mean we have to keep the policy rate rate is for longer but it's a re-acceleration of inflation through higher wage growth levels or higher rent prices that would perhaps necessitate an evaluation of whether even a 5 1/2% policy rate in the US is enough and so I think that would be the game changer. I think right now, even though we are seeing strong growth, the market prices all that in to his own estimate of inflation expectations and you can use inflation and bonds in the US for that and it's still fairly benign, still expecting around 2% inflation. So nothing right now is really pointing to a strong rebound in inflation but sticky inflation is still here.
>> Another audience question. I believe that this is based on an academic report that came out a few weeks ago. Some reports that there have questioned the value of having bonds in your portfolio, what are your thoughts?
That sort of turns the portfolio management theory on its head.
>> It's been a frustrating experiences or bond investors if your starting point was a couple of years ago when you are evaluating the two year period.
The bigger picture, the point of fixed income really comes down to a couple of main things and one of them is income and the others to provide a level of coupon return in your portfolio and in the second is some amount of diversification versus equity so historically, there has been this kind of negative correlation between particularly government bonds and equities so that if the equity part of your portfolio is going down, you usually see some appreciation in government bonds to help mitigate that downside.
What happened recently and why I think that's motivating some of this analysis is that we have seen a shift in those correlations where it's been more positive correlation so that when equities have been going down, bonds been going down as well.
So obviously a frustrating experience but it happens sometimes. Why? Inflation.
Inflation really can throw off these historical relationships between lots of different asset classes, so if you're worried that inflation could be high for a very long time, then you have to reevaluate this forward-looking correlation between bonds and equities.
But from my perspective, if we are seeing inflation, even though it is sticky and gradually coming down, eventually we will get past this. And get to a more normal, stable inflationary environment. Right now, there is still this uncertainty in the economy.
Once we get past that, I think we will start to see bonds and equities get towards more of that historical relationship where bonds can be more of a shock absorber. It depends on your time horizon. For long-term investors, it's about being patient.
In the meantime, if you are investing in fixed income, you are being paid to wait.
High-quality corporate bonds get you to may be a 45% level of yields and that's way above dividend yields in the S&P 500 which are when 1/2%.
So just about ensuring that your time horizon matches that asset allocation.
>> Intriguing question on that one.
Someone wants to get your thoughts on the emerging markets.
>> Yeah, so they've had a great year in bonds. EM, emerging-market bonds really outperformed last year really on the back of this idea of disinflation. Many emerging markets all inflation rise much more quickly earlier, they were proactive in hiking to very high levels and that inflation started to come down a little earlier compared to what we were seeing in developed markets. We saw social returns last year. But broadly speaking, when you have really strong global risk sentiment, when you have stable to declining US bond yields and when you have stable to declining US dollar, it's still a good asset class but when you look at valuations, they have gone, like many risk assets, valuations have gotten more challenging as a starting point so you really have to look at it on a country by country basis.
Where I would suggest focusing on is high-yielding emerging markets where you're getting a clear boost in income compared to say Canadian bond yields but more investment grade rated emerging markets where their fiscal policy is more stable, where politics are not as much of a risk. Mexico is a good example where they are very geared to the US economy so there growth has been soloed, the reshoring theme has been pretty strong.
That has kept the Mexican peso very stable.
You can go into a tenure Mexican bond and earn 9% yields, that 6% of of Canada, with the currency that's fairly stable. That's one type of opportunity. The other would be something like Indonesia where in Asia right now, broadly, inflation is not very high. So that's also a good prerequisite for bond investing is that inflation is not very volatile in Indonesia, it's maybe 3% right now which is not that bad.
You can get sort of stable levels of income in Indonesia, it 67% bond yields.
Those are the types of opportunities with triple B rated in emerging markets but you get a clear and calm advantage over Canada.
>> The US but, if it accelerates again, is that the biggest risk?
>> That would be the key risk, for sure.
Especially for same Mexico which is very geared to the US, it benefits one the US is doing well but at the same time, it's bond yields can be similar volatility to US bond yields so that would be the key thing to watch for and I think that's where emerging-market investing is very much not just a sit there, buy-and-hold and allocated across all countries. It really has to be country by country and you have a hedging program in place to hide your currency exposure if you start to see a shock.
>> Fascinating stuff.
As always, make sure you do your own research before making any investment decisions.
we are going to get back to your questions for Hafiz Noordin on fixed income in just a moment's time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get to our educational segment of the day.
We are talking fixed income on the show so let's talk about bond laddering, one fixed income strategy that investors may consider. Joining us now to show us how to set up a ladder on WebBroker's Caitlin Cormier, client education instructor with TD Direct Investing.
Let's talk about bond ladder's. Walk us through them.
>> I figured it was an appropriate topic to cover today with all the conversation around interest rate so let's jump into it. What is a bond ladder?
Bond laddering is a fixed investment strategy where investor purchases at multiple bonds with different maturity rates staggered over months or often years. Often times we are looking at different types of bonds, celiac corporate bonds as well as government bonds. The reason why you would do this is around improve predict ability of future income, you know that you have things coming due for the next few years, you know your income is going to look like, it also helps with liquidity. If you have something coming due every year rather than having something locked in for potentially five years if you are planning to hold to maturity, it gives you a bit more liquidity from that perspective. The idea of putting it into all these different types of bonds helps to reduce risks, so we have different types, different ratings of bonds so hopefully having a diversification of yield, a little bit higher yield with some of the corporate bonds versus some of the higher rated government bonds, it's just kind of a smooth stream of income as well as diversification. Those are some of the key reasons why investors who are looking at bonds in their portfolio should maybe consider something like bond laddering as opposed to just purchasing one bond.
>> We understand the bond ladder and how it can be used as an investment strategy.
Let's talk about whether broker and tools to help us create one.
>> Let's get our hands on that.
We are going to hop into a broker right away. We are going to go under research and we are going to go over to fixed income.
This is the portal where we have all of our fixed income products housed.
We are going to do today is choose a couple of different bonds to put together into a hypothetical letter. If you can kind of look here in the main part of my screen, we have quick picks which are a bunch of different types of fixed income products that have different categories of maturity dates. Let's go ahead and look, let's choose a corporate bond that has a maturity date in the next 0 to 5 years. We are going to randomly scroll through here and choose one coming due in 2027 and I'm just going to randomly choose a selection.
We will go US dollar. Sure.
We will choose this General Motors one, just randomly picking it here.
I'm going to check the box beside it, scroll to the top and I'm going to select and I actually have started a ladder here called March so we are just going to added to the portfolio.
We can see I also have two others, so one coming due in 2031, I have two in 2027, not great diversification but that's okay, we will get a couple of more in there.
We will go back to home. I'm going to choose a Canada bond.
Let's go out a little further in time and choose a date we don't have already, maturity dates are here in the middle, we will choose this one right here.
And we will choose to put it in March.
And we will choose one more, we have four, let's go with five.
Let's go with a provincial bond, 5 to 10 years, you will see all the different provinces in Canada and let's choose a 2031, let's go with Newfoundland, why not, and we will add that one to our portfolio.
Now we see a portfolio here are five different bonds with different coupon rates, maturities, pricing. Some of the ratings are similar but not also what we will do first is added a quantity, so how much we would do purchasing of each of these bonds. I'm going to put in 10,000 for now for illustrative purposes.
The next thing we are going to do is we went click calculate and then create ladder report.
Now, it is going to download onto your computer a PDF file. You can see it.
So what we have here, I'll just zoom in a little bit, what we have is a report here that is showing us this proposed fixed income ladder.
We have the different security names here, the prices, the quantity, the market value but what we also have is what our yield to maturity is, so with the total yield for the portfolio is, with the annual yield will be. Our term to maturity, our duration which has to do with changing interest rates, this is the percentage change in price that you can expect on the portfolio if interest rates change by one person. We can also see our total annual income here. We are going to have $2100 of income per year from these bonds.
If we scroll down, we can see more of a report that will show us what months we can effect income, it will show us different asset allocation, meeting with different types of bonds we have. We can see our maturity profile, so when money will be coming to you as well is a credit rating breakdown, so we have a little bit of diversification in credit rating as well. Lots of information to be seen on this type of report, just a way for you to put a few different bonds together and get an expectation of what that would look like if you were to go ahead and purchase them.
>> Great stuff as always, Caitlin. Thanks for that.
>> Thanks, Greg.
>> Caitlin Cormier, client education instructor with 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 you get back your questions about fixed income for Hafiz Noordin, 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.
Okay, we are back with Hafiz Noordin, taking your questions about fixed income.
This one just came in.
Someone wants to know what impact the BOC is going to have on the housing market?
This is a thorny issue for them that they get asked about over and over.
>> Quite a few questions today in the press conference around housing and the struggle is around this idea that keeping rates higher for longer poses a risk to those who have especially variable rate mortgages and the impact that has on their mortgage payments but even for those, when they are coming due in the next couple of years, they will be resetting to these higher rates.
So it's the balance of that and not letting that lead to a crash in the housing market and broader economy versus not cutting too quickly and allowing it inflation broadly to knock him back to 2% properly. I think for Canada and the Bank of Canada it's a tough Needles thread and I think it's really just going to be about monitoring. We did not get a monetary policy report update, we will get one in April, they have been periodically providing updates about how they view mortgage interest cost and how they see this maturity wall within the housing market evolving in the next couple of years.
So I think for now, they are not giving away too much in terms of any sense of concern around the rebound we are seeing in housing activity. There is some amount of it that is seasonal anyways, but at some point, if we see enough price appreciation, that could raise concerns that it will feed into higher rent costs here in Canada.
I think we are still early at that point but it's definitely something that's going to be a tough balancing act for them.
>> I found it interesting to you that after the decision today when they open it up to questions, the first one that came in was about real estate but not residential, it was about commercial.
The only one so far as to say we are going to have a financial review coming up and we have our eye on the commercial real estate space but it's a bit different in Canada and the United States. It was an interesting first question to get thrown out.
>> If anybody wants to point to potential tail risk out there, that the typical one right now because it's caused a lot of volatility in the US small regional banking sector.
For the most part, and we have credit analysts that look at this, they have really done the bottom-up work, they see those headlines we've seen of some banks getting in trouble is fairly idiosyncratic. Furthermore, in Canada, we know our banking sector is a lot more concentrated in large cap banks.
There are always going to be stability reviews around this.
>> I keep hearing about a slowing economy in China. Should I be worried about that and how it could impact the markets?
>> It's always a concern when you have China, which has been driving so much global growth the past couple of decades, at its current stage where it is struggling to boost long-term growth without increasing debt levels. The key issue has been the amount of leverage that's increased in their system and found its way into the property markets.
So we are seeing this unwinding of that leveraged property. But I would say from a market perspective is that a lot of the adjustment down in China's asset prices has already happened. When you look at Chinese equity prices, a fair amount of bad sentiment is already there so the starting point is not, is relatively more attractive. It's hard to see where it goes, but the channel it matters more for the Canadian economy is probably commodities because when we think of how does China's demand affect us it's really through… >> Copper, oil.
>> Exactly. I think from that perspective, again, commodities have largely discounted some of this decline in demand but we know that they are still targeting 5% growth.
That's what they are trying to achieve going forward.
So I think we just have to keep watching.
Does their ability, from a policy perspective, to manage lower growth, does not come into question and cause a step change down and commodities? That's what would impact the Canadian economy. I think for now, low growth, lower-than-expected growth in China is kind of baked into a lot of forecasts.
>> Another question now, a viewer is wondering about the current inverted yield curve and assuming an investment horizon greater than five years, does it make sense to invest solely in the front end and role of maturity? We cannot give investment advice on the platform.
What does the inverted yield curve mean for investors?
>> What's important to remember is that the normal yield curve is upward sloping.
Let's say you've got a five-year bond at 3% and laissez-faire round numbers your for your government bond is yielding 2%.
Normally when you bind that five-year bond, you get an income level, a bond of about 3% but a year later you will get a bit of price appreciation because the yield of that bond will go from 3% to 2% and we know that in bond math, when yields go down, the price of the bond goes up so you get that role down effect.
What's happening now though is with C inverted yield curve, the world on effect is been negative. There really isn't much of an opportunity to try to capture bond appreciation purely just from bonds going from five years to four years. If anything, there's a small amount of bond depreciation.
All of that is to say that in this environment you are focus more on the outright level of income.
That sort of the main driver of total return going forward, the amount of income.
And beyond that, it's more that if you are investing out the curve, the evolution of bond yields coming down with inflation hopefully coming down as well, that's what would drive more of the price effective your bonds, not so much how it rolls along the curve.
>> Very interesting stuff. We are going to get back your questions for Hafiz Noordin on fixed income in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
and a reminder that you 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.
Okay, let's get you updated on the markets and take a look at TD's Advanced Dashboard, a PlatForm designed for active traders available through TD Direct Investing. We are going to jump into the heat map function, it gives you a view of the market movers. We will start with the TSX 60 by Price and volume. The price of American benchmark route is a little more than 2%.
Gold continues to push to new highs, $2153 on my screen right now. How is applying out? A bit more firmly among the mining stocks. Kinross Gold a little more than 3%, Barrick up about 2%.
Some movement with big oil and gas names, nothing too dramatic. Suncor is a 1%, CVE, Cenovus, up about 1 1/3. South of the border, Jerome Powell telling us what we have been hearing from him for a while, they are not ready to cut radio. The market taking it all in, putting a bit more money into the tax base. Yesterday's selloff was heavily tech centred.
Nvidia is a 3 1/2, AMD a little more than three, Intel up to the tune of 5%. Some strength in some of those big tech names.
You can get more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We are back with Hafiz Noordin from TD Asset Management talking fixed income.
Someone wants to review on corporate bonds.
>> Corporate bonds had a great end to 2023, have continued to outperform government bonds this year with a higher level of income. I think what you generally have to think about is what are the fundamentals and credit saying and what that means is is economic growth looking solid? Yes.
Our earnings growth following along with that? Yes, we are seeing pretty good fundamentals there.
And consumption, all of that is based on pretty solid consumption, particularly in the US and developed markets broadly. From that perspective, corporate bonds make a lot of sense in terms of having an overweight versus government bonds.
Getting about 100 basis points of incremental yield if you are in US investment grade bonds. In Canada, it's a bit higher, you get about 130 basis points on average of incremental income. So I think the main risk though it is the starting point for evaluations, we have seen credit spreads coming down quite a bit. In the US, it's about call at 10 to 15 percentile that 100 basis points of incremental spread is at the lower end of the range historically but in Canada it's a bit more attractive. At 130 basis points, that's around the average level historically.
So I think it's really just about knowing where in the global investment grade market to invest and relate Canadian investment grade bonds right now and the only other consideration is knowing that spreads have come in a lot. It's good to have part of your portfolio and liquid government bonds as well to take advantage, if we see some unknown shock work its way through the market and we see wider corporate bonds. I think just about having the balance to get the higher income but make sure that you are ready to have room to buy more corporate bonds in your portfolio if we see better valuation.
>> That's investment grade corporate, what about high-yield?
>> Similar narrative around fundamentals in terms of earnings growth all looking pretty good. High-yield corporate bonds, you have to remember, are always fairly correlated with equities. On the long run, the return is about 60% correlated with equities so it moves with broader risk markets.
I think when you look at all in yields in high-yield, it's still a good story. The high-yield index yields about 8%.
Historically, the average is about 6 1/2.
So when many investors look at high-yield, they will see those yields and will allocate capital purely based on the all in yield. When you look underneath, most of that or a larger part of that higher yields coming from government bonds, so high-yield bonds like any government bond is a government bond plus spread.
High-yield debt spread is about 300 basis points now and the long-term average is closer to a little higher than 400 basis points.
They are a bit rich from a spread perspective but given the strength of fundamentals in the economy, they are worth an allocation and is just about ensuring that you are checking out the issuers, the corporate site could be downgraded.
>> April 16, the budget is coming up next month.
Anything you will be watching for?
>> I think from Canada the big concern but I think long-term is really about how do we ensure that our potential GDP growth is boosted from where we are now? Because I think productivity has been an issue in Canada and so what I mean by that is what we are looking for is how do we ensure increasing the productive capacity in the economy, housing is one area for sure, we talked about that a lot today, how is the supply of housing meeting the higher population growth that we have seen in Canada so I think that that's a critical area that they will need to address. I see beyond that it's the other parts of the economy where we need to see investments in productive capacity and ensuring that our economy is… >> It should be producing.
>> Yes. We see in the US is very dynamic.
The whole AI theme, there's a lot of innovation embedded in their economy.
We need to make sure we are moving in the same direction.
I think is the bigger picture things. We also look at their issuance. Based on their borrowing needs, where are they issuing in the government bond market because that can cause volatility in certain parts of the yield curve.
I think with very topical right now is that 30 Year Government Bonds in Canada are quite low compared to 10 year government bonds. It sort of negative inverted curve there so 30 year bond yields are about 10 basis points lower than 10 year yields and most other markets globally it's the other way around. You have higher 30 year yields than the tenure.
What that means is that is potentially an opportunity for the government to issue more in the 30 year because they can get lower borrowing costs. If we see things going in that direction, it would certainly impact how we are thinking of our curve exposure in a fixed income portfolio and avoiding 30 year bonds and favouring shorter bond so those are things we have to watch for as well in the budget.
>> Interesting stuff. We are out of time for questions. Before I let you go, I want to round back to the top of the discussion. The BOC has said the fight against inflation is not over. Where does that leave us?
>> Unfortunately for a lot of people who wanted answers, it is still wait-and-see mode. We have to keep watching the data.
Watch the hard data that's coming out, inflation data, jobs numbers.
It's really important as well to look at forward-looking indicators for inflation growth to get a better picture of with an assumption of rate cuts priced in, what will that do to growth and inflation going forward?
Is it sustainable or not?
I think in the meantime, from an investment perspective, there is are still strong opportunities to earn high levels of income in government bonds and high-quality corporate bond so I don't think anything right now is changing the strategy.
But making sure that you got liquidity in your portfolio and be ready to act if the data changes the narrative.
>> Always fascinating having you here.
Really enjoyed the conversation. Look forward to the next one.
>> Thanks very much.
>> Thanks to Hafiz Noordin, VP and Dir., active fixed income portfolio management at TD Asset Management.
As always, make sure you do your own research before making any investment decisions.
stay tuned for tomorrow show. Jared Abluss, VP of portfolio research at TD Asset Management will be our guest taking your questions about healthcare stocks.
You can get a head start on this question.
Just email moneytalklive@td.com. That's all the time you have the show today.
Thanks for watching. We will see you tomorrow.
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