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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 talk about what's next for the bond market. US 10 year treasury yield been flirting with that key 5% level. What does it all mean? TD Asset Management's has Hafiz Noordin towards us. MoneyTalk's Anthony Okolie is going to have a look at a new TD Economics report on the state of the Canadian housing market.
In today's WebBroker education segment, Nugwa Haruna is going to take us through the different types of order types to limit your risk in these choppy markets.
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 he gets our guest of the day, let's get you an update on the markets. We have a down session on Bay and Wall Street. Not quite as deep in the hole here at home.
We will start with the TSX Composite Index, down about 30 points, a little more than 1/10 of a percent. Noticing weakness across several sectors.
The financial stocks are holding in today, definitely helping us, we are not in positive territory but it's keeping us from being deeper in the hole. On the tech side, we are seeing considerable weakness south of the border and that's carrying over to some of our names here in Toronto including Shopify. At 6483, the stock has been on a downward path the last couple of sessions, down about 3% today.
First Quantum minerals, noticing some pressure and some mining names in the material space.
First Quantum at 27 and change, down a little more than 3%. South of the border, we will get into the details in a moment, but the US economy is coming along pretty strong. 10 year bond yields moving close to five, investor tried to put it all together, what does it mean?
You're down 29.2 three quarters of a percent for the S&P 500. We are in the thick of tech earnings and it's been a bit of a mixed bag. Some companies getting hit pretty hard.
Right now you have the overall NASDAQ opposite down hundred and 89 points, one and 1/2%.
Want to check in on Meda, speaking of tech companies that have been reporting, right now you have Meta Platforms on the backside of their report down about 3 1/2%.
And that's your market update.
The 10 year treasury yield hovering near the key level of 5%.
South of the border investors are digesting yet another strong economic report, this time GDP. Work and we go from here? Joining us now to discuss, VP, director, and active fixed income portfolio manager at TD Asset Management.
We have a lot to go through. We did get a pretty strong rate in the US economy today. We have been living for the past little while with this US 10 year bond yield that keeps learning with 5%.
Put it all together, where are we?
>> Yeah, like you said, it's been a big move from 4% to 5% on the US 10 year.
Usually what causes bond yields two rises you have tight monetary policy, rising interest rates from the central bank or you have loose fiscal policy, so large borrowing from the government which would mean that rates have to go higher to fund that.
The surprise here is we have had both.
I think what was more expected this year was the tender monetary policy. We are getting the data, strong growth led by the US, inflation that although it is above the target. Feeling some concerns that he could feed into another round of inflation.
But that's the part that was generally known.
It's persisting for longer than what might have been expect it. What was a bit of a surprise here is that loser fiscal policy at a time when generally you would expect fiscal policy to get a little tighter. The deficit in the US in particular should have been lower than 5% GDP. Instead, it surprised closer to 6-7% of GDP. That's a lot more money that needs to be borrowed in the market and that's been fuelling this move.
>> If we are talking about budget deficits, larger than expected spending out of Washington, is it time to start discussing bond vigilantes?
I know they showed up last year, are they showing up in the states?
>> Yeah, I think to a certain extent, there is the marginal buyer of bonds has changed from what was there before.
In the past, we were used to the central bank with its QE programs being a consistent buyer of bonds. We were used to US banks being consistent buyer's and foreign sovereign wealth funds and reserve managers from other countries being generally consistent in the US bond market. They are all stepping back for different reasons.
There's a quantity of tightening, US banks don't have as much deposits as they used to.
With that, we are seeing more of the private sector being the one to step in as the marginal buyer and they are definitely more price-sensitive. I wouldn't necessarily say we are in a period where it's complete vigilante mode. It's not like what we saw in say Greece or Italy, but definitely more price sensitivity.
And therefore, more focus on this idea of what is a fair value of government bonds in the US, given the fiscal outlook and given policy rates in the central banks have to stay higher for longer.
>> I come from a journalism background.
We love numbers like 5% or 4% because it's easy in terms of storytelling. Is there a significance in the real world, the fixed income world, do 10 year yield at 5% or higher?
>> There is merit to it because psychological levels makes sense because at the end of the day, the market is just a bunch of humans all of which have behavioural biases.
The 5% level has stuck out. It's around number. The other piece to think about is market tends to look back at historical periods of when the US 10 year traded at 5%.
And what you can point to is the 2006 2007. Before the global financial crisis.
The peak in the US 10 year at that part of the cycle was around 5 to 5.2.
So the market has moved, repriced yield higher and it is now thinking, okay, are we now similar in terms of this cycle compared to 2006, 2007? You can make the argument that growth was very strong then as it is now but they probably had a bit of higher potential growth in the global economy sense. You had a much stronger China, a much stronger Europe. And so you can see why rates were higher back then.
But on the flipside, you also had less government debt compared to what you have now.
So you go lower potential growth now but higher government debt and higher deficits.
So I think those are sort of balancing themselves out to kind of say that 5% might be fair for the near term. But I think we need to look forward then to what happens when the labour market starts to crack a little bit.
Where do rates go when we still think there is more room cyclically for US yields to come down?
>> The world continues to become a more dangerous place. Just the past couple of weeks, massive geopolitical event in conflict in the Middle East. You put that on top with what had already been taking place for a while with Ukraine and Russia.
Quite a lot of risk out there. Bonds were traditionally a haven play.
Could we see that in the next little while?
>> They should in the long run provide safe haven status in a portfolio. That hasn't worked in the past few months for sure. Correlations with bonds and equities have gone more positive so bonds and equities are moving up or down together.
It largely goes back to the idea that there are concerns right now about funding these fiscal deficits and the large amount of issuance. I think that's been skewing these correlations.
Right now we have seen the safe haven status be more evident in the US dollar and in gold.
I think those are two markets where we have seen that correlation be more negative relative to equities.
I think, bigger picture, in a longer timeframe, bond yields will continue to still be a major flight to quality asset, particularly US treasuries just because you generally still have a lot of foreign investors coming into the US market when they are trying to seek protection from their capital. Dad you mentioned earlier about central banks, we got this ball rolling about a year and 1/2 ago. We heard from our central bank yesterday, we are getting the Fed next week, we got the European Central Bank today. There's a lot going on.
What is standing out to you?
>> I would glean from all of those that they are in a similar stage of a hawkish hold.
So they've done a lot of tightening. They are seeing growth data staying strong but not necessarily running away and they are seeing inflation coming down from the peaks and generally trending back to target but at a fairly slow pace.
So this idea that they want to pause and be at these very restrictive rate levels and see how it plays out, but also commit to keeping those rates higher for longer, that's the balance they are playing of not sounding too dovish by pausing, showing that they have commitment to getting inflation down, and that may mean that there is no rate cuts anytime soon. For the Fed and the Bank of Canada in particular, really looking to the second half of next year for one we could see rate cuts if inflation does meet the targets that they are seeking for next year.
>> Great insights with Hafiz Noordin. We are going to do your questions on fixed income in just a moment's time.
A reminder that you get 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 stories in the world of business and take a look at how the markets are trading.
Facebook owner meadow warning the ongoing conflict in the Middle East may weigh on advertising sales. The social media platform is providing a much wider range for the earnings guidance than it normally does it do to that uncertainty.
That said, Meda's quarterly earnings easily topped expectations, revenue jumped 23%. It right now, investors are focused on the other part. Got Meda down about 3 1/2%. Shares of toymakers Mattel and Hasbro under pressure on weak sales forecasts. The success of the Barbie movie help Mattel deliver strong quarterly earnings but the company is saying it is seeing slowing demand heading into the all-important holiday shopping season.
Hasbro delivering a similar warning, cutting its annual forecast after missing on sales and profit expectations.
Right now you have Hasbro down a little more than 11%. Let's bring it home.
Canadian Pacific Kansas City, the latest company on the side of the border to feel the pinch of the slowing economy. The railway has lowered its financial forecast for the year amid softer demand and the lingering impact of a 13 day port strike in BC. However, the company says synergies from the acquisition of Kansas City Southern will allow it to target double-digit earnings-per-share growth in early 2024. The shares holding and despite the broader market weakness, up a little shy of a full percent.
Quick check in on the markets, we will start here on Bay Street with the TSX Composite Index. Right now, we have some downward momentum, 63 point, nothing too dramatic, about 1/3 of a percent. South of the border, we see weakness led by big tech names.
The S&P 500, the broader read of the American market, down almost a full percent.
We are back with Hafiz Noordin from TD Asset Management, taking your questions about fixed income. Let's get to them.
Someone keeping their eye on the headlines this morning. They see that the ECB held rates and seemed pretty dour about the state of the European economy. What are your thoughts? Is this a big potential risk?
>> We talked about this idea that central banks like ECB have raised rates quite a bit. I think the key difference in the European or euro zone economy relative to the US has been the downside in growth prospects and so if you look at for instance the PMI data which provides a forward-looking survey for where growth is going, they are well below the 50 mark, so that means they are in contractionary territory, unlike in the US, which is still running at trends like growth. So the downside risk for growth are much higher than in Europe but at the same time core inflation has still only come back from a peak of 5 1/2 to 4 1/2, well above the 2% inflation target.
So they are going to have one of the biggest challenges right now of trying to avoid a state inflationary environment.
>> It sounds like you're setting up the continent for a pretty dire circumstance.
People don't like that. They are afraid of the word stagflation.
>> If you don't have a job and you are also seeing prices go up, it's a terrible combination. It's a really tough one to get out of.
They have I think the toughest job in terms of that balance, how high and how long to keep rates in restrictive territory.
I think at the end of the day, the ECB has one mandate which is inflation unlike the Federal Reserve which has a dual mandate of inflation as well as the economy and the labour market. So for the euro zone, I think they're going to have to stay hawkish for a while but I think when they say that they are going to pause at this level, that looks like they're going to have to do it for a while.
>> Many years ago, it feels like a million years after everything we've been through, but when Greece was having problems, we were worried about contagion effects on other parts of Europe.
Are we now on such a divergent path now?
>> It's been a process of that EU experiment of going through crises and that helping them and forcing them to make their institution stronger.
So I think the gradual union that started as a monetary union but didn't have much of a fiscal union, there has been progress in having more alignment in terms of how they manage their fiscal balances as different countries, how their banking sector works together.
So all of those things have improved a lot from say 2011 back in the day when you would see credit spreads on Italy or Portugal or Greece that widen it dramatically say versus Germany. You are seeing a little bit more stability in those relationships but it's still volatile, I think it is still a risk that is out there but when they have lived through so I think there is some sense that they do have the tools to manage a sovereign crisis a little bit better than say 10 years ago.
>> If a fixed income investor was looking at Europe at the fact that the economy is in this kind of situation, does that provide opportunities? Only in the sense, you and I have discussed before that there are some markets that will be cutting sooner than others but Europe sounds complicated.
>> Yeah, it is tough with everything, momentum being a little bit slower. The challenge going back over a year ago when the Russian Ukraine conflict started was their energy and puts into inflation and I don't think that's something we can assume has totally gone away.
There are more upside risks to inflation around that. There are more upside risks to inflation in Europe around wage growth.
Their wage study processes a bit more slower and so I think that's where I think Canada and US economies are a little bit more dynamic in terms of having wages adjust downwards to inflation quicker than Europe would.
So I would suggest that particularly in Canada where inflation dynamics are a bit more positive and also growth is not necessarily running away the way it is in the US, I would say Canada is looking a bit more attractive compared to Europe.
>> Let's get to another audience question.
One viewer wants to know, what is the best way to assess high-yield bonds? What's the homework here?
>> High-yield bonds, like any corporate bond, there are two components to the yield. When you look at the yield of a bond or a bond fund, there is the underlying government bond exposure. So a corporate bond, if it's a a five year bond, is priced off the five year government bond rate plus some sort of spread, credit spread that compensates you for the risk that that company could default and not payback.
So for high-yield bonds, right now when you look at say five year rates, around number of about 5%, and the extra credit spread, the extra income you get over that to compensate for the risk of default for high-yield bonds is about 4 to 4 1/2%.
Call at 9 to 10% of all in yields when you put it all together.
The question is do you think that credit spread is going to increase a lot because you might be getting into a recession?
It's really a macro call. If you think you are going to get into a hard landing scenario, high-yield spreads will have to increase a lot and you will get a decline in your high-yield bond prices because of that.
But if you think we are going to get into a soft landing scenario, maybe have a modest increase in credit spreads, then that extra 4 to 5% income will actually buffer you from that price impact.
It really comes down to that.
>> All right. I've still got questions about bond yields out there. A viewer want to know if bond yields are higher, which means investors are selling bonds, where does the money go?
>> Right.
I guess what's important to remember in markets is you can have a repricing in assets, for bonds or equities or anything, you can have a repricing without necessarily having buyers or sellers in the market actually trading at those levels. You have these market makers that are at the centre of these markets that may see strong growth data or strong inflation data and reprice bond yields higher because of that. In an ideal world, you actually have a lot of buyers and sellers in the market so that every data point or trade point, you actually do have volume behind them.
But what's been happening is that with the amount of volatility in the government bond market, liquidity has come down a lot.
You tend to see these drop your markets which means that there is really Higher.
You might have a flood of sellers coming in and not many people buying.
And that causes marketmakers to than simply reprice yields to a new level where there is more equilibrium between buyers and sellers.
That's the state we are in right now where there is a little bit more price discovery, to our earlier point of what is a fair value for US 10 year government bond in the third part of the curve?
That requires marketmakers to reprice yields in a more choppy are fashioned to figure out where our buyers and sellers coming to an equilibrium?
>> The other day someone was talking about other times of financial distress, phoning up, saying, on my terminal it says I can get this price for.
And the responses sell it to your computer because that's not the price and selling out today.
>> Liquidity can dry up when you try to go in and execute and the larger size you are going to try to deal, you may have to get a concession.
We are seeing that in the government treasuries, the U.S. Treasury itself trying to issue new bonds.
They will see where the market is and they will try to come in and issue 50 billion of five-year bonds, that so they tried to do yesterday, and it turns out the market want to basis points higher.
So the issue or the auction tailed and that's the kind of data that we have to keep following. How are those new auctions going to assess the health of the government bond market.
>> Very interesting stuff.
As always, at home, do your own research before you make any investment decisions.
We will be back with your questions for Hafiz Noordin on fixed income in just a moment.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now let's get our educational segment of the day.
During times of market volatility, you may consider using different order types to limit your downside risk. Joining us with more on this is Nugwa Haruna, senior client education instructor with TD Direct Investing. Great to have you back on the show. Let's talk about the kind of order types available to investors on WebBroker.
>> Yeah, so Greg, as you know, yesterday was a very volatile day, especially thanks to the announcements for a lot of the tech companies. So some investors who were holding investments in their account, they may see the price of that security drop significant lead. Investors want to protect themselves against potential loss when it comes to their portfolio or protect some of the profits they made.
They may consider using certain types of order types.
Today we will be looking at the most basic stop order which is the stock market order.
I'm going to hop into WebBroker and show investors who are holding securities how they could potentially protect themselves.
Once in WebBroker, you want to go research and stocks.
And at this point, I will go in the stock I already have on the screen. Say I'm holding the specific security but I want to protect myself after I purchased it.
I'm simply going to click sell.
Once I do this, it doesn't mean I'm selling it right away.
What I want to do is under price type, I will click on the drop down and go stop market.
A new box shows up which is called the trigger price. This is where the investor can then go ahead and and put in the price that they want to exit the position.
Let's say we own 100 Delta stock, purchased at $25, now Italia 31 so we made some money here.
We don't want to lose all the money we made. What I could do is say I'm going to put $29. What this tells me is if the price of Delta drops to $29, I'm saying I want to protect some of the profits I've made and exit the markets.
Please keep in mind that because it is called the trigger price, this is an activation price.
It doesn't mean this is the price I will sell my stock for. It only means that my order will be sent to the market as a market order which then means I'll get the next available price which may be great for me or not so great for me.
>> What if you are in a situation where the stock, we know they go higher as well as lower, so the stock has been moving higher, how would you adjust that trigger price?
>> Great question.
What tends to happen is sometimes we set our stop orders and forget about it.
What if the price, as you said, goes from $31-$51.
Do I need to go back into the system and change my trigger price? Yes, I could do that, go back in the system, change my trigger price from 29 to let's say 49, but if I want the system to do that for me, there is a way for me to do that.
Back in WebBroker, instead of me using the order type that is a stop market, instead when I click on that drop down, I change my order type from a stop market to a trailing stop market.
I'm going to click on the trailing stop market option here.
Instead of trigger price, I have something called trigger Delta.
This is essentially how much I want my new trigger price to trail the current market price.
For this example, I'm going to put a figure, let's say $2.47 and you will see the logic behind me putting that random number. By putting $2.47 here, I'm saying, based on right now, if the stock drops by $2.47, which means the new price will be $29, I want to sell.
But say the price actually goes up and it goes to $51.47.
Guess what? My new trigger price will be 5147-247 which means my new trigger price is $49.
So I won't have to come into the system to change the price, the system does that for me.
That's something that investors can use.
You can use price type or you can actually use percentages. If you click where it has a $, you can change that to a percentage trailing and so once again what this does for you is it protects your portfolio, your security, once a stock price starts to drop and the stock price goes up, trigger price goes up, but if the stock price drops, your trigger price stays put and you're able to potentially sell your security.
I want to talk about some risks with using this, using stop orders. As with everything, there are risks. What might happen is the stock price made to temporarily see you end up selling and then the price bounces back up so that's a risk that you want to consider when using this.
>> I may or may not have seen that in my own life on some occasions. Great stuff as always. Thanks.
>> Thanks for having me.
>> Thanks to Nugwa Haruna, senior client education instructor at TD Direct Investing.
Check out the learning centre on WebBroker for more educational materials. And a reminder that October is investor education month.
[music] We are back with Hafiz Noordin, take your questions about fixed income.
This one coming in in the past couple of moments. How will higher spending on debt interest by governments impact the markets?
>> That's a very important question right now. I would say there are two parts to it.
One relates to what we just talked about which is the fiscal deficits that are persisting, especially out of the US. Part of that is higher interest costs. We are seeing that take up a larger portion of government spending across the globe. And so I think there is that first-order effect which is that it will require potentially more borrowing by governments to fund that, but ideally, it means they will actually get more disciplined around their fiscal balances and try to cut spending so that they have more sustainable debt dynamics.
I think that's the first point where we have to watch how do governments manage this, how do they make sure they have the discipline? If they are not going to be disciplined, there is at risk of higher bond yields from near to price set in. But the second effect would be more thinking about how does this impact growth and inflation?
The more the governments are spending on interest expense, the list that they have available to spend in other parts of the real economy and really have available to stimulate the economy if needed.
So what that would mean is going into next year and as we see growth starting to come down in the economy in general, we could see then that governments won't be able to step in as much to help stimulate growth.
So what that would mean for the markets is that we should then see that bond yields will gradually come down because… Similar to what would be happening with households where they will be spending more on mortgage costs and that means less available to spend in the economy so demand declines and inflation should decline as well.
That would be kind of the thinking going out a year or so from now, and realizing that growth prospects should be lower because of these higher interest rate costs.
>> Another question about the bond market and how it impacts mortgage rates over the next few months.
That's a pretty tight timeline to figure out. What are our thoughts here?
>> Yeah, if we focus on Canada in particular, the Canadian sort of conventional mortgage rate is largely linked to the five-year Canadian government bond, so what we've been seeing over the past few months has been an increase in the five-year government bond in Canada and the US and that has led to a higher mortgage rate so we see for instance the posted conventional mortgage rate go from 6 1/2 to 7% said that kind of the headline number. If you kind of project from here on, if we listen to what the Bank of Canada said yesterday, they are looking to keep rates, their policy rate on hold and so we won't necessarily expect a lot of movement in short-term interest rates.
So mortgage rates that are shorter-term in nature, one year or two year, likely should say stable given what the Bank of Canada has said. But if you look at five-year yields which are increasing, so we are seeing kind of a steepening of the yield curve, we are seeing 5 to 10 year yields increase more compared to two year, there is a risk that mortgage rates could still continue to go up over the next few months. So that's what we have to watch is what's happening in the government bond market, what's causing the yield curve to change and knowing that the five-year part of the curve in Canada would lead to changes to our mortgage rates.
>> It seems like a hee hee consideration to make because considering when the BOC decided to pause earlier this year, there seemed to be an understanding in the real estate market that they are done, and not only are they done but they will start cutting. I don't think the BOC was too happy about that.
Central now banks want to seem to want to send a strong message that we are not easing anytime soon.
>> It all comes down to the inflation data. It's well above target. What has been constructed for Canada at least was the last CPI print showing a reasonable decline but we can never just project from one month and we have to make sure that the trend is intact, that core inflation is meaningfully coming down. So the Bank of Canada what a target for next year, and of 2024 CPI to be at about 2 1/2%, so they are not saying we are going to be back to target next year but it will be a bit above target and so we just have to watch how this inflation data, how consistent is it with the Bank of Canada forecast and if it's not declining as quick as what's in their new forecast, then you have to expect that instead of getting rate cuts in September next year, maybe there won't be any rate cuts next year.
That's what we really have to watch is how was the inflation data evolving versus what they are pricing into their forecast.
>> A lot of people watching that carefully. Another audience question.
A viewer wants to know, what's the better option, bonds of two or three year duration or GIC with a similar timeframe?
Here on the platform we can give advice but we can talk about the two different scenarios and the pros and cons.
>> Sure. I think if you look at a typical what we call a short-term bond fund which would be that 2 to 3 year duration, the yield on a typical fund, this probably about 5 to 5 1/2%.
So if we think about what could you get in GIC land with that similar level of income, you probably have to login for at least a year or 18 months or so depending on the platform, and it would be non-redeemable during that time, not cashable. I think that's a key trade-off is that you can get a little bit more certainty in the income level in the GIC but your liquidity is basically zero. You have to lock it in.
With a short-term bond fund, you're getting that attractive level of income because it's call it a two year duration.
Any changes in bond yields have a very low impact in terms of the price impact.
To put it into perspective, a 1% move, if we get a big 1% move higher into your rates, that basically would have a -2% impact on the total return of that short-term bond fund.
But that still compares to about a five, 5 1/2% income return. So your total return on prospects for a short-term bond fund are still very strong in that sense.
And you get the liquidity in the bond fund where you can put your money in, earn your income, you accrue that income over time and then you can exit at any point you like and that helps your portfolio to have more liquidity.
>> What do investors need to think about if they are getting into the bond space, dipping their toes in the water, but holding to maturity?
What if you hold to maturity?
>> You can buy bonds directly and then you have a known maturity for that investment and the investment of holding to maturity and having an instrument to do that would be that you know exactly what your yield is going to be over that time and you can earn that by holding your money and ensuring that that investment, your lending to a borrower that won't default.
When you are investing in a fund, the fund managers will do that for you and typically roll the bonds down the curve and then reinvestment higher yields or reinvest them based on where yields are further out in the curve and so it's just about that decision of do you want that certainty of knowing exactly what the yield is or having an active manager do some of that for you and not only look at government bonds but even corporate bonds where you have… It's a trade-off of control versus the flex ability embedded in a bond fund.
>> We will get back to your questions for Hafiz Noordin on fixed income in just a moment time.
As always, do your own research before making any investment decisions.
And a reminder that you can get touches 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.
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.
[music] Okay, we are having look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing.
This is the heat map function. A few of the market movers. Let's start by screening for the TSX 60 by price and volume.
The financial stocks are holding in today.
On a lot of games but they are putting points on the table. What's taking the points off the table?
We are seeing weakness in the tech stocks over the past couple of days, south of the border and here at home.
You got Shopify right now down a little more than 4% and some significant moves to the downside in the material space, whether with First Quantum down workers more than 4% or AEM down about 3%.
Utilities getting a bid, there some green on the screen.
South of the border, the US economy continues to hum along. You got US 10 year treasury yields at about 4.9 right now as investors put it all together, and a bevy of tech stock earnings, here's how it sort of playing out. You got Meta, the latest one out of the gate with its earnings for us to weigh down by 4 1/2%. You got the chipmaker and video down, apple, I could pick any of them out of the hat for you here. Microsoft and Google reported earlier this week. Microsoft went higher on its earnings but now it's join the club to the downside. You can find 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.
Let's get to another audience question.
What are the pros and cons of ETF such as TLT for the long-term investor at this time?
>> Sure, yeah. There's a lot of ways to approach that. At a basic level, you have to understand or that bond ETF, where is it investing, what are the country? We are seeing a lot of dispersion and how different government bond yields are behaving. TLT is one example, it's one of the largest government bond ETF but it's all in the US long the end of the curve so what 20+ year maturities.
It's one way to get long-duration into a portfolio but it's focused on the US and what we have been seeing over the last few months is a big underperformance in US government bonds compared to Canadian government bonds.
That would be one thing to make sure is understanding what country that an ETF or a fund is invested in and then currency is the other part of it where you have to not only think about the volatility of the government bonds but also the currency. An ETF like that would be in the US dollar so that has to be factored into your portfolio and tolerance perform currencies. There's also this idea of some ETF's are passives and some are active.
Same thing in mutual funds.
And understanding with the process underneath it, versus just going for the one that may be have the largest assets or have a lot of liquidity. You have to factor in how it is managed. In government bonds, you typically see them and passive vehicles but if it's going to include corporate bonds or emerging-market bonds, that active versus passive decision gets much more critical and understanding what's the process to invest, passive ETFs would be just using some rule that often for corporate bonds means you are lending to the biggest borrowers and same thing with emerging markets.
That may not be a rule you want to follow right now especially with everything we talked about around debt dynamics.
So in an active solution, whether it's an ETF or a fund, if it's going to include corporate or emerging markets or other riskier parts of the bond market, you will really want to make sure you understand what's the process, what research is going behind that. So that's always important to consider whether it's in ETFs or other funds.
>> The audience saved me the toughest question for last. If you can answer this one I think you will have the entire market figured out. What's the new neutral rate?
>> It's what I call one of those really esoteric questions in the market.
There are some of those variables I would think there should be a good measure for it but there isn't and the reality is, nobody knows.
The best that we can kind of point to is what central banks God. So if you look at the Fed of the Bank of Canada, they have consistently maintained a neutral brilliant that's between 2 to 3%. Let's take the midpoint, that's about 2 1/2.
Arguably, there is a case to be made that neutral rates may have gone up, and I think there is a reasonable case there because what's changed compared to say five, 10 years ago?
Well, we don't have as much globalization so we are seeing less capital or capital is not flowing as freely as it used to. At the end of the day, with the neutral rate is measuring is how much capital there is in the world available in the form of savings to fund investments and what is the demand in terms of the use of that capital?
And we are definitely seeing that there could be evidence that there is a shift in the balance, there is may be less savings available to fund all of the investments that government or corporate or households need.
But the reality is we won't know what's that landing point of the usual rate until it happens, until central banks move rates and figure out where is the economy in equilibrium. The only saying that I would say is look at the Fed.chart. The medium long term.is between 2 and 3 AM but there are a few dots where Fed members are thinking they could be as high as 3 1/2 or 3.75% neutral rates.
It really shows where the debate is and where is this view that we potentially are seeing neutral rates that could be three or north of 3%. So it something we will have to see over the coming years.
>> We are out of time for questions. As a final thought, there's a lot going on in the world of fixed income.
What should people keep in mind going forward through the year?
>> Volatility has been very uncomfortable and it has continued to be what the long one should be or the safe part of your portfolio. I realize that is been a tough journey but I think at the end of the day when you have two, what we have to recognize is if your time horizon is long enough, you are seeing yields in the bond market that are very attractive and if you have a plan to deploy your capital in a gradual way, these are levels where I think you were able to capture the strong levels of income and just really stick to the plan you have from a long-term perspective, realize the volatility comes and goes in different asset classes. But if you take that out of the equation, take the emotional, behavioural part out and stay to a mechanical plan, you will be able to get through this and meet your objectives of the long run.
>> Always a great conversation, always great to have you. I look forward to the next time.
>> Thank you very much.
>> Thanks to Hafiz Noordin, VP, director and active fixed income portal you manager at TD Asset Management.
Always be sure to do your own research before you make any investment decisions.
Stay tuned. We will be back tomorrow, with an update from the markets and clips from our best interviews of the week. On Monday, Nicole Ewing, Dir. of tax and estate planning a TD Wealth will be our guest taking your questions.
You can get a head start with this question. Just email moneytalklive@td.com.
That's all the time we have the show today, thanks for watching.
[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 talk about what's next for the bond market. US 10 year treasury yield been flirting with that key 5% level. What does it all mean? TD Asset Management's has Hafiz Noordin towards us. MoneyTalk's Anthony Okolie is going to have a look at a new TD Economics report on the state of the Canadian housing market.
In today's WebBroker education segment, Nugwa Haruna is going to take us through the different types of order types to limit your risk in these choppy markets.
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 he gets our guest of the day, let's get you an update on the markets. We have a down session on Bay and Wall Street. Not quite as deep in the hole here at home.
We will start with the TSX Composite Index, down about 30 points, a little more than 1/10 of a percent. Noticing weakness across several sectors.
The financial stocks are holding in today, definitely helping us, we are not in positive territory but it's keeping us from being deeper in the hole. On the tech side, we are seeing considerable weakness south of the border and that's carrying over to some of our names here in Toronto including Shopify. At 6483, the stock has been on a downward path the last couple of sessions, down about 3% today.
First Quantum minerals, noticing some pressure and some mining names in the material space.
First Quantum at 27 and change, down a little more than 3%. South of the border, we will get into the details in a moment, but the US economy is coming along pretty strong. 10 year bond yields moving close to five, investor tried to put it all together, what does it mean?
You're down 29.2 three quarters of a percent for the S&P 500. We are in the thick of tech earnings and it's been a bit of a mixed bag. Some companies getting hit pretty hard.
Right now you have the overall NASDAQ opposite down hundred and 89 points, one and 1/2%.
Want to check in on Meda, speaking of tech companies that have been reporting, right now you have Meta Platforms on the backside of their report down about 3 1/2%.
And that's your market update.
The 10 year treasury yield hovering near the key level of 5%.
South of the border investors are digesting yet another strong economic report, this time GDP. Work and we go from here? Joining us now to discuss, VP, director, and active fixed income portfolio manager at TD Asset Management.
We have a lot to go through. We did get a pretty strong rate in the US economy today. We have been living for the past little while with this US 10 year bond yield that keeps learning with 5%.
Put it all together, where are we?
>> Yeah, like you said, it's been a big move from 4% to 5% on the US 10 year.
Usually what causes bond yields two rises you have tight monetary policy, rising interest rates from the central bank or you have loose fiscal policy, so large borrowing from the government which would mean that rates have to go higher to fund that.
The surprise here is we have had both.
I think what was more expected this year was the tender monetary policy. We are getting the data, strong growth led by the US, inflation that although it is above the target. Feeling some concerns that he could feed into another round of inflation.
But that's the part that was generally known.
It's persisting for longer than what might have been expect it. What was a bit of a surprise here is that loser fiscal policy at a time when generally you would expect fiscal policy to get a little tighter. The deficit in the US in particular should have been lower than 5% GDP. Instead, it surprised closer to 6-7% of GDP. That's a lot more money that needs to be borrowed in the market and that's been fuelling this move.
>> If we are talking about budget deficits, larger than expected spending out of Washington, is it time to start discussing bond vigilantes?
I know they showed up last year, are they showing up in the states?
>> Yeah, I think to a certain extent, there is the marginal buyer of bonds has changed from what was there before.
In the past, we were used to the central bank with its QE programs being a consistent buyer of bonds. We were used to US banks being consistent buyer's and foreign sovereign wealth funds and reserve managers from other countries being generally consistent in the US bond market. They are all stepping back for different reasons.
There's a quantity of tightening, US banks don't have as much deposits as they used to.
With that, we are seeing more of the private sector being the one to step in as the marginal buyer and they are definitely more price-sensitive. I wouldn't necessarily say we are in a period where it's complete vigilante mode. It's not like what we saw in say Greece or Italy, but definitely more price sensitivity.
And therefore, more focus on this idea of what is a fair value of government bonds in the US, given the fiscal outlook and given policy rates in the central banks have to stay higher for longer.
>> I come from a journalism background.
We love numbers like 5% or 4% because it's easy in terms of storytelling. Is there a significance in the real world, the fixed income world, do 10 year yield at 5% or higher?
>> There is merit to it because psychological levels makes sense because at the end of the day, the market is just a bunch of humans all of which have behavioural biases.
The 5% level has stuck out. It's around number. The other piece to think about is market tends to look back at historical periods of when the US 10 year traded at 5%.
And what you can point to is the 2006 2007. Before the global financial crisis.
The peak in the US 10 year at that part of the cycle was around 5 to 5.2.
So the market has moved, repriced yield higher and it is now thinking, okay, are we now similar in terms of this cycle compared to 2006, 2007? You can make the argument that growth was very strong then as it is now but they probably had a bit of higher potential growth in the global economy sense. You had a much stronger China, a much stronger Europe. And so you can see why rates were higher back then.
But on the flipside, you also had less government debt compared to what you have now.
So you go lower potential growth now but higher government debt and higher deficits.
So I think those are sort of balancing themselves out to kind of say that 5% might be fair for the near term. But I think we need to look forward then to what happens when the labour market starts to crack a little bit.
Where do rates go when we still think there is more room cyclically for US yields to come down?
>> The world continues to become a more dangerous place. Just the past couple of weeks, massive geopolitical event in conflict in the Middle East. You put that on top with what had already been taking place for a while with Ukraine and Russia.
Quite a lot of risk out there. Bonds were traditionally a haven play.
Could we see that in the next little while?
>> They should in the long run provide safe haven status in a portfolio. That hasn't worked in the past few months for sure. Correlations with bonds and equities have gone more positive so bonds and equities are moving up or down together.
It largely goes back to the idea that there are concerns right now about funding these fiscal deficits and the large amount of issuance. I think that's been skewing these correlations.
Right now we have seen the safe haven status be more evident in the US dollar and in gold.
I think those are two markets where we have seen that correlation be more negative relative to equities.
I think, bigger picture, in a longer timeframe, bond yields will continue to still be a major flight to quality asset, particularly US treasuries just because you generally still have a lot of foreign investors coming into the US market when they are trying to seek protection from their capital. Dad you mentioned earlier about central banks, we got this ball rolling about a year and 1/2 ago. We heard from our central bank yesterday, we are getting the Fed next week, we got the European Central Bank today. There's a lot going on.
What is standing out to you?
>> I would glean from all of those that they are in a similar stage of a hawkish hold.
So they've done a lot of tightening. They are seeing growth data staying strong but not necessarily running away and they are seeing inflation coming down from the peaks and generally trending back to target but at a fairly slow pace.
So this idea that they want to pause and be at these very restrictive rate levels and see how it plays out, but also commit to keeping those rates higher for longer, that's the balance they are playing of not sounding too dovish by pausing, showing that they have commitment to getting inflation down, and that may mean that there is no rate cuts anytime soon. For the Fed and the Bank of Canada in particular, really looking to the second half of next year for one we could see rate cuts if inflation does meet the targets that they are seeking for next year.
>> Great insights with Hafiz Noordin. We are going to do your questions on fixed income in just a moment's time.
A reminder that you get 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 stories in the world of business and take a look at how the markets are trading.
Facebook owner meadow warning the ongoing conflict in the Middle East may weigh on advertising sales. The social media platform is providing a much wider range for the earnings guidance than it normally does it do to that uncertainty.
That said, Meda's quarterly earnings easily topped expectations, revenue jumped 23%. It right now, investors are focused on the other part. Got Meda down about 3 1/2%. Shares of toymakers Mattel and Hasbro under pressure on weak sales forecasts. The success of the Barbie movie help Mattel deliver strong quarterly earnings but the company is saying it is seeing slowing demand heading into the all-important holiday shopping season.
Hasbro delivering a similar warning, cutting its annual forecast after missing on sales and profit expectations.
Right now you have Hasbro down a little more than 11%. Let's bring it home.
Canadian Pacific Kansas City, the latest company on the side of the border to feel the pinch of the slowing economy. The railway has lowered its financial forecast for the year amid softer demand and the lingering impact of a 13 day port strike in BC. However, the company says synergies from the acquisition of Kansas City Southern will allow it to target double-digit earnings-per-share growth in early 2024. The shares holding and despite the broader market weakness, up a little shy of a full percent.
Quick check in on the markets, we will start here on Bay Street with the TSX Composite Index. Right now, we have some downward momentum, 63 point, nothing too dramatic, about 1/3 of a percent. South of the border, we see weakness led by big tech names.
The S&P 500, the broader read of the American market, down almost a full percent.
We are back with Hafiz Noordin from TD Asset Management, taking your questions about fixed income. Let's get to them.
Someone keeping their eye on the headlines this morning. They see that the ECB held rates and seemed pretty dour about the state of the European economy. What are your thoughts? Is this a big potential risk?
>> We talked about this idea that central banks like ECB have raised rates quite a bit. I think the key difference in the European or euro zone economy relative to the US has been the downside in growth prospects and so if you look at for instance the PMI data which provides a forward-looking survey for where growth is going, they are well below the 50 mark, so that means they are in contractionary territory, unlike in the US, which is still running at trends like growth. So the downside risk for growth are much higher than in Europe but at the same time core inflation has still only come back from a peak of 5 1/2 to 4 1/2, well above the 2% inflation target.
So they are going to have one of the biggest challenges right now of trying to avoid a state inflationary environment.
>> It sounds like you're setting up the continent for a pretty dire circumstance.
People don't like that. They are afraid of the word stagflation.
>> If you don't have a job and you are also seeing prices go up, it's a terrible combination. It's a really tough one to get out of.
They have I think the toughest job in terms of that balance, how high and how long to keep rates in restrictive territory.
I think at the end of the day, the ECB has one mandate which is inflation unlike the Federal Reserve which has a dual mandate of inflation as well as the economy and the labour market. So for the euro zone, I think they're going to have to stay hawkish for a while but I think when they say that they are going to pause at this level, that looks like they're going to have to do it for a while.
>> Many years ago, it feels like a million years after everything we've been through, but when Greece was having problems, we were worried about contagion effects on other parts of Europe.
Are we now on such a divergent path now?
>> It's been a process of that EU experiment of going through crises and that helping them and forcing them to make their institution stronger.
So I think the gradual union that started as a monetary union but didn't have much of a fiscal union, there has been progress in having more alignment in terms of how they manage their fiscal balances as different countries, how their banking sector works together.
So all of those things have improved a lot from say 2011 back in the day when you would see credit spreads on Italy or Portugal or Greece that widen it dramatically say versus Germany. You are seeing a little bit more stability in those relationships but it's still volatile, I think it is still a risk that is out there but when they have lived through so I think there is some sense that they do have the tools to manage a sovereign crisis a little bit better than say 10 years ago.
>> If a fixed income investor was looking at Europe at the fact that the economy is in this kind of situation, does that provide opportunities? Only in the sense, you and I have discussed before that there are some markets that will be cutting sooner than others but Europe sounds complicated.
>> Yeah, it is tough with everything, momentum being a little bit slower. The challenge going back over a year ago when the Russian Ukraine conflict started was their energy and puts into inflation and I don't think that's something we can assume has totally gone away.
There are more upside risks to inflation around that. There are more upside risks to inflation in Europe around wage growth.
Their wage study processes a bit more slower and so I think that's where I think Canada and US economies are a little bit more dynamic in terms of having wages adjust downwards to inflation quicker than Europe would.
So I would suggest that particularly in Canada where inflation dynamics are a bit more positive and also growth is not necessarily running away the way it is in the US, I would say Canada is looking a bit more attractive compared to Europe.
>> Let's get to another audience question.
One viewer wants to know, what is the best way to assess high-yield bonds? What's the homework here?
>> High-yield bonds, like any corporate bond, there are two components to the yield. When you look at the yield of a bond or a bond fund, there is the underlying government bond exposure. So a corporate bond, if it's a a five year bond, is priced off the five year government bond rate plus some sort of spread, credit spread that compensates you for the risk that that company could default and not payback.
So for high-yield bonds, right now when you look at say five year rates, around number of about 5%, and the extra credit spread, the extra income you get over that to compensate for the risk of default for high-yield bonds is about 4 to 4 1/2%.
Call at 9 to 10% of all in yields when you put it all together.
The question is do you think that credit spread is going to increase a lot because you might be getting into a recession?
It's really a macro call. If you think you are going to get into a hard landing scenario, high-yield spreads will have to increase a lot and you will get a decline in your high-yield bond prices because of that.
But if you think we are going to get into a soft landing scenario, maybe have a modest increase in credit spreads, then that extra 4 to 5% income will actually buffer you from that price impact.
It really comes down to that.
>> All right. I've still got questions about bond yields out there. A viewer want to know if bond yields are higher, which means investors are selling bonds, where does the money go?
>> Right.
I guess what's important to remember in markets is you can have a repricing in assets, for bonds or equities or anything, you can have a repricing without necessarily having buyers or sellers in the market actually trading at those levels. You have these market makers that are at the centre of these markets that may see strong growth data or strong inflation data and reprice bond yields higher because of that. In an ideal world, you actually have a lot of buyers and sellers in the market so that every data point or trade point, you actually do have volume behind them.
But what's been happening is that with the amount of volatility in the government bond market, liquidity has come down a lot.
You tend to see these drop your markets which means that there is really Higher.
You might have a flood of sellers coming in and not many people buying.
And that causes marketmakers to than simply reprice yields to a new level where there is more equilibrium between buyers and sellers.
That's the state we are in right now where there is a little bit more price discovery, to our earlier point of what is a fair value for US 10 year government bond in the third part of the curve?
That requires marketmakers to reprice yields in a more choppy are fashioned to figure out where our buyers and sellers coming to an equilibrium?
>> The other day someone was talking about other times of financial distress, phoning up, saying, on my terminal it says I can get this price for.
And the responses sell it to your computer because that's not the price and selling out today.
>> Liquidity can dry up when you try to go in and execute and the larger size you are going to try to deal, you may have to get a concession.
We are seeing that in the government treasuries, the U.S. Treasury itself trying to issue new bonds.
They will see where the market is and they will try to come in and issue 50 billion of five-year bonds, that so they tried to do yesterday, and it turns out the market want to basis points higher.
So the issue or the auction tailed and that's the kind of data that we have to keep following. How are those new auctions going to assess the health of the government bond market.
>> Very interesting stuff.
As always, at home, do your own research before you make any investment decisions.
We will be back with your questions for Hafiz Noordin on fixed income in just a moment.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now let's get our educational segment of the day.
During times of market volatility, you may consider using different order types to limit your downside risk. Joining us with more on this is Nugwa Haruna, senior client education instructor with TD Direct Investing. Great to have you back on the show. Let's talk about the kind of order types available to investors on WebBroker.
>> Yeah, so Greg, as you know, yesterday was a very volatile day, especially thanks to the announcements for a lot of the tech companies. So some investors who were holding investments in their account, they may see the price of that security drop significant lead. Investors want to protect themselves against potential loss when it comes to their portfolio or protect some of the profits they made.
They may consider using certain types of order types.
Today we will be looking at the most basic stop order which is the stock market order.
I'm going to hop into WebBroker and show investors who are holding securities how they could potentially protect themselves.
Once in WebBroker, you want to go research and stocks.
And at this point, I will go in the stock I already have on the screen. Say I'm holding the specific security but I want to protect myself after I purchased it.
I'm simply going to click sell.
Once I do this, it doesn't mean I'm selling it right away.
What I want to do is under price type, I will click on the drop down and go stop market.
A new box shows up which is called the trigger price. This is where the investor can then go ahead and and put in the price that they want to exit the position.
Let's say we own 100 Delta stock, purchased at $25, now Italia 31 so we made some money here.
We don't want to lose all the money we made. What I could do is say I'm going to put $29. What this tells me is if the price of Delta drops to $29, I'm saying I want to protect some of the profits I've made and exit the markets.
Please keep in mind that because it is called the trigger price, this is an activation price.
It doesn't mean this is the price I will sell my stock for. It only means that my order will be sent to the market as a market order which then means I'll get the next available price which may be great for me or not so great for me.
>> What if you are in a situation where the stock, we know they go higher as well as lower, so the stock has been moving higher, how would you adjust that trigger price?
>> Great question.
What tends to happen is sometimes we set our stop orders and forget about it.
What if the price, as you said, goes from $31-$51.
Do I need to go back into the system and change my trigger price? Yes, I could do that, go back in the system, change my trigger price from 29 to let's say 49, but if I want the system to do that for me, there is a way for me to do that.
Back in WebBroker, instead of me using the order type that is a stop market, instead when I click on that drop down, I change my order type from a stop market to a trailing stop market.
I'm going to click on the trailing stop market option here.
Instead of trigger price, I have something called trigger Delta.
This is essentially how much I want my new trigger price to trail the current market price.
For this example, I'm going to put a figure, let's say $2.47 and you will see the logic behind me putting that random number. By putting $2.47 here, I'm saying, based on right now, if the stock drops by $2.47, which means the new price will be $29, I want to sell.
But say the price actually goes up and it goes to $51.47.
Guess what? My new trigger price will be 5147-247 which means my new trigger price is $49.
So I won't have to come into the system to change the price, the system does that for me.
That's something that investors can use.
You can use price type or you can actually use percentages. If you click where it has a $, you can change that to a percentage trailing and so once again what this does for you is it protects your portfolio, your security, once a stock price starts to drop and the stock price goes up, trigger price goes up, but if the stock price drops, your trigger price stays put and you're able to potentially sell your security.
I want to talk about some risks with using this, using stop orders. As with everything, there are risks. What might happen is the stock price made to temporarily see you end up selling and then the price bounces back up so that's a risk that you want to consider when using this.
>> I may or may not have seen that in my own life on some occasions. Great stuff as always. Thanks.
>> Thanks for having me.
>> Thanks to Nugwa Haruna, senior client education instructor at TD Direct Investing.
Check out the learning centre on WebBroker for more educational materials. And a reminder that October is investor education month.
[music] We are back with Hafiz Noordin, take your questions about fixed income.
This one coming in in the past couple of moments. How will higher spending on debt interest by governments impact the markets?
>> That's a very important question right now. I would say there are two parts to it.
One relates to what we just talked about which is the fiscal deficits that are persisting, especially out of the US. Part of that is higher interest costs. We are seeing that take up a larger portion of government spending across the globe. And so I think there is that first-order effect which is that it will require potentially more borrowing by governments to fund that, but ideally, it means they will actually get more disciplined around their fiscal balances and try to cut spending so that they have more sustainable debt dynamics.
I think that's the first point where we have to watch how do governments manage this, how do they make sure they have the discipline? If they are not going to be disciplined, there is at risk of higher bond yields from near to price set in. But the second effect would be more thinking about how does this impact growth and inflation?
The more the governments are spending on interest expense, the list that they have available to spend in other parts of the real economy and really have available to stimulate the economy if needed.
So what that would mean is going into next year and as we see growth starting to come down in the economy in general, we could see then that governments won't be able to step in as much to help stimulate growth.
So what that would mean for the markets is that we should then see that bond yields will gradually come down because… Similar to what would be happening with households where they will be spending more on mortgage costs and that means less available to spend in the economy so demand declines and inflation should decline as well.
That would be kind of the thinking going out a year or so from now, and realizing that growth prospects should be lower because of these higher interest rate costs.
>> Another question about the bond market and how it impacts mortgage rates over the next few months.
That's a pretty tight timeline to figure out. What are our thoughts here?
>> Yeah, if we focus on Canada in particular, the Canadian sort of conventional mortgage rate is largely linked to the five-year Canadian government bond, so what we've been seeing over the past few months has been an increase in the five-year government bond in Canada and the US and that has led to a higher mortgage rate so we see for instance the posted conventional mortgage rate go from 6 1/2 to 7% said that kind of the headline number. If you kind of project from here on, if we listen to what the Bank of Canada said yesterday, they are looking to keep rates, their policy rate on hold and so we won't necessarily expect a lot of movement in short-term interest rates.
So mortgage rates that are shorter-term in nature, one year or two year, likely should say stable given what the Bank of Canada has said. But if you look at five-year yields which are increasing, so we are seeing kind of a steepening of the yield curve, we are seeing 5 to 10 year yields increase more compared to two year, there is a risk that mortgage rates could still continue to go up over the next few months. So that's what we have to watch is what's happening in the government bond market, what's causing the yield curve to change and knowing that the five-year part of the curve in Canada would lead to changes to our mortgage rates.
>> It seems like a hee hee consideration to make because considering when the BOC decided to pause earlier this year, there seemed to be an understanding in the real estate market that they are done, and not only are they done but they will start cutting. I don't think the BOC was too happy about that.
Central now banks want to seem to want to send a strong message that we are not easing anytime soon.
>> It all comes down to the inflation data. It's well above target. What has been constructed for Canada at least was the last CPI print showing a reasonable decline but we can never just project from one month and we have to make sure that the trend is intact, that core inflation is meaningfully coming down. So the Bank of Canada what a target for next year, and of 2024 CPI to be at about 2 1/2%, so they are not saying we are going to be back to target next year but it will be a bit above target and so we just have to watch how this inflation data, how consistent is it with the Bank of Canada forecast and if it's not declining as quick as what's in their new forecast, then you have to expect that instead of getting rate cuts in September next year, maybe there won't be any rate cuts next year.
That's what we really have to watch is how was the inflation data evolving versus what they are pricing into their forecast.
>> A lot of people watching that carefully. Another audience question.
A viewer wants to know, what's the better option, bonds of two or three year duration or GIC with a similar timeframe?
Here on the platform we can give advice but we can talk about the two different scenarios and the pros and cons.
>> Sure. I think if you look at a typical what we call a short-term bond fund which would be that 2 to 3 year duration, the yield on a typical fund, this probably about 5 to 5 1/2%.
So if we think about what could you get in GIC land with that similar level of income, you probably have to login for at least a year or 18 months or so depending on the platform, and it would be non-redeemable during that time, not cashable. I think that's a key trade-off is that you can get a little bit more certainty in the income level in the GIC but your liquidity is basically zero. You have to lock it in.
With a short-term bond fund, you're getting that attractive level of income because it's call it a two year duration.
Any changes in bond yields have a very low impact in terms of the price impact.
To put it into perspective, a 1% move, if we get a big 1% move higher into your rates, that basically would have a -2% impact on the total return of that short-term bond fund.
But that still compares to about a five, 5 1/2% income return. So your total return on prospects for a short-term bond fund are still very strong in that sense.
And you get the liquidity in the bond fund where you can put your money in, earn your income, you accrue that income over time and then you can exit at any point you like and that helps your portfolio to have more liquidity.
>> What do investors need to think about if they are getting into the bond space, dipping their toes in the water, but holding to maturity?
What if you hold to maturity?
>> You can buy bonds directly and then you have a known maturity for that investment and the investment of holding to maturity and having an instrument to do that would be that you know exactly what your yield is going to be over that time and you can earn that by holding your money and ensuring that that investment, your lending to a borrower that won't default.
When you are investing in a fund, the fund managers will do that for you and typically roll the bonds down the curve and then reinvestment higher yields or reinvest them based on where yields are further out in the curve and so it's just about that decision of do you want that certainty of knowing exactly what the yield is or having an active manager do some of that for you and not only look at government bonds but even corporate bonds where you have… It's a trade-off of control versus the flex ability embedded in a bond fund.
>> We will get back to your questions for Hafiz Noordin on fixed income in just a moment time.
As always, do your own research before making any investment decisions.
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[music] Okay, we are having look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing.
This is the heat map function. A few of the market movers. Let's start by screening for the TSX 60 by price and volume.
The financial stocks are holding in today.
On a lot of games but they are putting points on the table. What's taking the points off the table?
We are seeing weakness in the tech stocks over the past couple of days, south of the border and here at home.
You got Shopify right now down a little more than 4% and some significant moves to the downside in the material space, whether with First Quantum down workers more than 4% or AEM down about 3%.
Utilities getting a bid, there some green on the screen.
South of the border, the US economy continues to hum along. You got US 10 year treasury yields at about 4.9 right now as investors put it all together, and a bevy of tech stock earnings, here's how it sort of playing out. You got Meta, the latest one out of the gate with its earnings for us to weigh down by 4 1/2%. You got the chipmaker and video down, apple, I could pick any of them out of the hat for you here. Microsoft and Google reported earlier this week. Microsoft went higher on its earnings but now it's join the club to the downside. You can find 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.
Let's get to another audience question.
What are the pros and cons of ETF such as TLT for the long-term investor at this time?
>> Sure, yeah. There's a lot of ways to approach that. At a basic level, you have to understand or that bond ETF, where is it investing, what are the country? We are seeing a lot of dispersion and how different government bond yields are behaving. TLT is one example, it's one of the largest government bond ETF but it's all in the US long the end of the curve so what 20+ year maturities.
It's one way to get long-duration into a portfolio but it's focused on the US and what we have been seeing over the last few months is a big underperformance in US government bonds compared to Canadian government bonds.
That would be one thing to make sure is understanding what country that an ETF or a fund is invested in and then currency is the other part of it where you have to not only think about the volatility of the government bonds but also the currency. An ETF like that would be in the US dollar so that has to be factored into your portfolio and tolerance perform currencies. There's also this idea of some ETF's are passives and some are active.
Same thing in mutual funds.
And understanding with the process underneath it, versus just going for the one that may be have the largest assets or have a lot of liquidity. You have to factor in how it is managed. In government bonds, you typically see them and passive vehicles but if it's going to include corporate bonds or emerging-market bonds, that active versus passive decision gets much more critical and understanding what's the process to invest, passive ETFs would be just using some rule that often for corporate bonds means you are lending to the biggest borrowers and same thing with emerging markets.
That may not be a rule you want to follow right now especially with everything we talked about around debt dynamics.
So in an active solution, whether it's an ETF or a fund, if it's going to include corporate or emerging markets or other riskier parts of the bond market, you will really want to make sure you understand what's the process, what research is going behind that. So that's always important to consider whether it's in ETFs or other funds.
>> The audience saved me the toughest question for last. If you can answer this one I think you will have the entire market figured out. What's the new neutral rate?
>> It's what I call one of those really esoteric questions in the market.
There are some of those variables I would think there should be a good measure for it but there isn't and the reality is, nobody knows.
The best that we can kind of point to is what central banks God. So if you look at the Fed of the Bank of Canada, they have consistently maintained a neutral brilliant that's between 2 to 3%. Let's take the midpoint, that's about 2 1/2.
Arguably, there is a case to be made that neutral rates may have gone up, and I think there is a reasonable case there because what's changed compared to say five, 10 years ago?
Well, we don't have as much globalization so we are seeing less capital or capital is not flowing as freely as it used to. At the end of the day, with the neutral rate is measuring is how much capital there is in the world available in the form of savings to fund investments and what is the demand in terms of the use of that capital?
And we are definitely seeing that there could be evidence that there is a shift in the balance, there is may be less savings available to fund all of the investments that government or corporate or households need.
But the reality is we won't know what's that landing point of the usual rate until it happens, until central banks move rates and figure out where is the economy in equilibrium. The only saying that I would say is look at the Fed.chart. The medium long term.is between 2 and 3 AM but there are a few dots where Fed members are thinking they could be as high as 3 1/2 or 3.75% neutral rates.
It really shows where the debate is and where is this view that we potentially are seeing neutral rates that could be three or north of 3%. So it something we will have to see over the coming years.
>> We are out of time for questions. As a final thought, there's a lot going on in the world of fixed income.
What should people keep in mind going forward through the year?
>> Volatility has been very uncomfortable and it has continued to be what the long one should be or the safe part of your portfolio. I realize that is been a tough journey but I think at the end of the day when you have two, what we have to recognize is if your time horizon is long enough, you are seeing yields in the bond market that are very attractive and if you have a plan to deploy your capital in a gradual way, these are levels where I think you were able to capture the strong levels of income and just really stick to the plan you have from a long-term perspective, realize the volatility comes and goes in different asset classes. But if you take that out of the equation, take the emotional, behavioural part out and stay to a mechanical plan, you will be able to get through this and meet your objectives of the long run.
>> Always a great conversation, always great to have you. I look forward to the next time.
>> Thank you very much.
>> Thanks to Hafiz Noordin, VP, director and active fixed income portal you manager at TD Asset Management.
Always be sure to do your own research before you make any investment decisions.
Stay tuned. We will be back tomorrow, with an update from the markets and clips from our best interviews of the week. On Monday, Nicole Ewing, Dir. of tax and estate planning a TD Wealth will be our guest taking your questions.
You can get a head start with this question. Just email moneytalklive@td.com.
That's all the time we have the show today, thanks for watching.
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