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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 with the second half of the year may look like for the bond market with Scott Colbourne,managing director of active fixed income at TD Asset Management.
And in today's WebBroker education segment, Caitlin Cormier is going to walk us through how you can create a bond ladder strategy using the platform.
So 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 our guest of the day, let's get you an update on the markets.
The Americans are back at it. Of course, we had our long weekend and so you got trading on Bay Street and Wall Street. We'll start here at home with the TSX Composite Index.
We are down we will call that 92 points are a little less than half a percent among some of the most actively traded names on the TSX at this hours include Osisko Gold Royalties, a fairly substantial pullback in that name.
A release out from the company saying they are searching for a new CEO.
You see the stock down a little more than 11%.
Also moving on fairly heavy volumes is Shopify. To the downside. It had a bit of a run in recent sessions and today at 8467, it's down a little shy about 2%, nothing too dramatic. South of the border, I could say that now they are starting the second half of the year in earnest. They had a long weekend and were off yesterday.
Today on the S&P 500, investors waiting for 2 PM Eastern time, getting the latest Fed minutes. We know it was a pause or skip or whatever you want to call it.
A little more flavoured from around the table as to what they are actually thinking on that front. Got the S&P 500 ahead of that down the benefits of a percent.
Let's check in on the tech heavy NASDAQ. It's pretty much in line with the broader market. Done about 1/10 of a percent.
United Parcel Service, UPS, apparently in talks with the Teamsters union around an impasse. The contract expires at the end of the month. It covers about 340,000 UPS workers. Stock down modestly on that news, and hundred and 80 bucks and change, UPS is down about 1.6%. And that is your market update.
We are past the halfway point of the trading year and many central banks are still signalling there could be more hikes to come to tame inflation. Joining us now to discuss what the current environment looks like the bond market is Scott Colbourne, managing director of active fixed income at TD Asset Management. Welcome back.
>> Thanks. Great to be here.
>> As we had the halfway point of the year, perhaps we are in a situation where the markets a couple of months ago thought we would be.
Central banks might have been done by now, maybe signalling cut. It's a different landscape now where they are still threatening to hike borrowing costs. Had we read it for the bond market?
>> I think we can take a little bit of a lesson from the first half of the year.
When you think back to the beginning of this year, we were quite concerned about recession, inflation. As you pointed out, there was some expectation of a cut at some point.
But you know there were rallies and selloffs, rallies and selloffs in the fixed income market.
At the end of the day, I think we look back and it was sort of what we call an income year first half of the year.
Maybe that is in instructive for the second half of the year as well. It basically you didn't get the big rally, you can get the reliefthat investors are looking for, the pivot out of the central banks, and so maybe this is the playbook for the second half of the year, that we will just have another income type of year, clipping the coupon for the balance of the year as we sort of sorted out these challenges.
Is the recession going to play out?
How many more hikes are left. Central banks in Canada and the US have one to two hikes price in the market.
In that environment, maybe you don't get any relief in terms of a big rally in long rates or short rates but you get an income year which is maybe not what we were looking for at the beginning of the year but it is satisfactory.
>> On the equity side, I talk to investors who are dividend investors, they say, I am getting paid to wait. I'm still collecting those dividend payments.
Same thing in the bond space? You're getting out coupons that you were not getting before all this.
>>yes.
That's why think you have to think about income liquidity and hedging as tools thatfixed income play and for the first time in a long time, we have income and it's a great tool to have.
Yeah, we are paid to wait. If you have some long-duration assets in your portfolio, that might hedge the possibility of a recession.
>> Only talk about the central banks, it's interesting in the fact that although we thought we may be done by now, we were getting strong signals from the Fed that there might be a few more to go, Bank of Canada after surprising last month perhaps has another one for us.
At the same time, I see people say, it might not be over but we are obviously closer to the end of the cycle then we are to the beginning.
How does that set us up going forward?
>> I think that is a fair way of thinking about it.
I will refer to Gov. Tiff Macklem. Basically, headline inflation has come down.
we are concerned about the sticky core inflation and how that plays out. He pointed out that over the course of the next year,going from 3 to 2 is the target. And so that is going to mean central banks, if that plays out, things are steady and there are no big shocks, it's going to be higher for longer in terms of central bank policy. So is it one? Two hikes at the Fed, the BOC?
I don't know.
It doesn't really matter. If you get one more and they are on hold for six months, the type of expectation sort of has to be factored into the market and that will plan to mortgage markets, it will play and portfolios. And at the end of the day, that lends itself to a coupon clipping market.
>> What would it take to knock him off old? If they played out the way it seems it will be done, maybe two more from the Fed, maybe one more or not from the Bank of Canada and they stop.
They have clearly communicate it and said that we are going to get there and hold for a longer period than perhaps the market had been predicting. What knocks them off the course, makes them reverse to mark >> You could get a Goldilocks scenario. All of a sudden, that core inflation just as a wonderful transition to 2% and we continue to have gross and that just gives the central banks who say they are in restricted territory the ability to maybe factor in a cut or she would not give them relief and that is obviously a positive scenario for markets.
You would also get the darker recession. Things cracked, whether it's in the UK or Canada, with housing driven challenges or in other markets.
You have to handicapped as probabilities and those are examples of what could take the Fed and the BOC off the track.
>> Looking at Britain, it's a bit of a different situation given that their headline inflation isn't coming down.
Is that something that is idiosyncratic to the British economy, everything with Brexit and other factors, or do we need to worry about it here?
>> No, I think that's the way to look at it. They've had a lot of idiosyncratic things.
The markets got six more hikes priced in there.
You look around the world and maybe it's a one or two and then you got the UK which is taking the policy rate from where they are now to about 6 1/4.
So it's definitely different than elsewhere and when you look at the early movers which were emerging markets, number of those markets are transitioning to definitely on pause and even raising the possibility of cuts.
So the UK look singularly different than others throughout the world in addition to Japan which is on the opposite side of that.
>> When I think about investors who are hunting for yield, obviously an environment like this, the math kind of changes.
Before all this, the Tina trade. There is no alternative.
People were trying to get some gain for their portfolio.
They were not getting it off coupons. In this environment, obviously you got bonds paying a coupon that they were not paying for a while.
You also have GICs, money market funds.
Was the competitive landscape for investors dollars and where are they flowing to mark >> It's been a great year for fixed income. I know that some people look at the returns as modest or the arguments that you should be in fixed income and it would be the year of fixed income.
Besides that, we had about $120 billion of flows into the fixed income market in the US and a lot of that has gone into the government bond market. Broadly speaking, investors have usedthis adjustment higher in yield as an opportunity to rebalance the portfolio's and add to income and are patient and willing to take it given even if it sticks at the high level and even if it hasn't played out to sort of the playbook that people were looking for at the beginning of this year.
>> Interesting times indeed. We are going to get your questions about fixed income for Scott Colbourne in 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.
Benchmark home prices in greater Vancouver crept higher in June to hit $1.2 million, that's a 1.3% increase from the month before. The local real estate Board says while sales volumes have improved compared to last year, they are still almost 9% lower than the 10 year seasonal average.
These June numbers capture roughly 3 weeks of market activity following the Bank of Canada surprise rate hike on June 7.
Moderna says it has a deal to develop messenger RNA drugs for the Chinese market.
The US drugmaker says they signed a memorandum of understanding with Chinese officials which will see it work towards the research, development and manufacturing of medicine in the country.
That messenger RNA platform is the basis for Moderna's COVID 19. You can see the stock up about 2.8%.
The head of Saudi oil giant Aramco says he's optimistic crude demand will improve once China's economy recovers and the recessionary fears abate. Speaking at an OPEC conference in Vienna, Amin Nasser says China's economy is still picking up but global economic headwinds appear to be everywhere, and that is pressuring crude prices. While he did say he expects demand to improve in the future, he did not give a specific timeframe.
Let's chicken on the market, we will start here at home with the TSX Composite Index. We are down 91 points are little bit less than half a percent.
South of the border, as we await the Fed minutes from the last meeting where they held were skipped or paused or whoever they want to characterize it, we are down a very modest 7 1/2 points, less than 1/5 of a percent.
We are back with Scott Colbourne, take your questions about fixed income.
Let's get to them. Here's one.
The viewer starts off saying, this is difficult to know, but by September or October, not that far off, where do you see the Canadian short term bonds, one to five years, higher or lower than today's date? And how about 1 to 5 year fixed rate mortgages? What we think happens in the short term here?
>> I think the likeliest scenario is that rates are slightly higher in the short end of the market.
I'm not talking substantially higher but that is the likeliest playbook. The Bank of Canada and the Fed indicating to the balance of this year that we will have another hike. It's a 50-50 tossup for the Bank of Canada in July but basically by the end of the year,we will have at least one, maybe two hugs priced into the market. I think that just reinforces essentially and on hold short end of the Canadian bond market.
While we are seeing evidence related to that in the oil story, slowdown, we are definitely seeing it on the manufacturing side, we are starting to slowly creep into the servicing side of the economy.
I think that there is still enough moments and that over the next three months, which is the timeframe for this viewer, that rates will probably be where they are right now. So that means mortgage rates are going to stay roughly where they are.
>> Do we anticipate that when we hit the hold phase for the Fed of the BOC that they would be a hawkish hold?
I imagine there would be some stern words like we might be pausing here, but we have to wait and see.
>> We are not cutting on this pivot. In the next cycle, the rates might be a lot less than previous rate cutting cycles, but I think at the end of the day, they will be communicating what you talked about. It's a hawkish hold. The RBA, the Bank of Australia, has alluded to that this week where they went on hold but they definitely communicated that there are risks to inflation, that we've had a lot of hikes priced in.
All these markets, all of these developed markets have had a tremendous amount of rapid increases. Last July, we were at 1/2% in Canada.
We've come a long way quickly and you have to think that these long and variable lags have to take time to play out in consumers pocketbooks and as corporations refinance and stuff like that.
So it's going to keep things, this hawkish hold mentality as the prevailing narrative in the market. As she mentioned how far we've come in 15 months since we've started hiking. He also said that once you get into a cutting cycle, it's probably not going to take us back to where we were before. Are we in a new sort of environment?
Do people, investors or borrowers or mortgage holders, have dropped their heads around the fact that we are probably not going back to where we were a year and 1/2 ago in terms of rock-bottom borrowing costs?
> I think there's a lot of things that we are trying to get our heads around in this next cycle but it seems that the likelihood is that the cutting cycle may be half of what it has been in the past.
There are many factors at play, de-globalization or supply chain adjustments, the wage market is stickier.
The labour market is still tight but we are going to be loosening up from a very low level so there are a lot of factors that suggest to me that central banks have to be careful in terms of how much they cut.
>> Let's go to another question.
Viewer wants to know your thoughts on the high-yield bond market. You see any opportunities in high yield?
>> So when the year started, the high-yield market was around, yielded 8.75 So you are halfway through the year and your return is just about 5%, so in line with a coupon return with a little bit of compression and spreads, right now we are at may be eight and 1/4, 8 1/2% in the high-yield market. And so if you take the analogy and the playbook that I argued for the beginning of this interview, you're probably going to coupon like returnsthrough the balance of the year and if you are happy with that type of thing, high yield can offer you some returns.
That said, increasingly the risk looks to be more on the downside then a Goldilocks recovery and more likelihood of recession. So there are risks that these spreads might pull that return down to closer to 2 1/2 or 3%.
>> I have heard, and probably from you in conversation about high yield, that if you are thinking about the space, it's not just one basket. We're talking about different issuers and if you need to look at these companies and how their balance sheets might look heading into an economic slowdown.
>> Absolutely.
I just use the generic index and it's an interesting way of thinking about it.
We had this tremendous equity rally and junk is part of high-yield markets with equity like returns.
You have to be very thoughtful if you are buying on an individual basis. Do your homework just as you do in other situations. Let's take another question now.
Plenty coming in for the audience. It when you see wage growth cooling substantially? This is a big part of the equation.
You're worried about services, higher wages and stickiness.
> Yeah, I will go back to the comment.
Macklin said, look, the road that we have to travel from here to the end of next year to get inflation back to 2% is going to be a tough road to travel. And that meansright now, wages are four or 5%. That is not consistent with 2% inflation.
So the trajectory is going to be lower over the course of that year and a bit.
That means that central bank, absent any real negative shocks, is going to be keeping rates higher for longer and it's going to take a while but we just have to come down.
>> This is the first time you and I have had the chance to toxins at the price hike on June 7. They slipped in an interesting line because they have talked before about wage pressures and inflation outlook. They slipped in corporate pricing. What do you think that was all about? Obviously, part of the inflation a picture is when I go out and fill up the car or buy groceries, I am paying more.
>> It's the ability of corporations to pass through price increases to consumers. I think initially pent-up savings from a variety of programs post-COVID have given the developed world and a credible tailwind but the longer rates are held higher and people are refinancing, their budgets get readjusted, those tailwindstaper up.
The capacity of consumers to absorb that corporate pricing behaviour becomes less and less.
So that is something that for the time being they are concerned that corporations are taking advantage of this and passing on prices to consumers.
And that is not a behaviour that they want to reinforce.
>> In my household, how to the pandemic, we went out.
My wife would always ask after trip her meal, how much did that cost? Finally, she said to put on the brakes.
I said, probably good advice.
As always, make sure you do your own research before making any investment decisions.
we will get back to your questions for Scott Colbourne on fixed income in just a moment 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 today.
one income investment strategy may consider screening a bond ladder.
Her to walk us through it is Caitlin Cormier, client education instructor with TD Direct Investing.
>> Bond laddering is an investment strategy or an investor can purchase multiple bonds with different maturity dates staggered over several months or weeks even or most often years.
So the reason that somebody might employ a bond strategy is to improve predictability of future income, so you're making sure that your staggering those payments over a regular basis, ensuring adequate liquidity is maintained for unseen obligations or other investment opportunities, so where we have a bunch of different maturity, we are not waiting for example for five years for everything to come due.
We potentially have something coming due each year so there's a bit more flex ability with liquidity. It also reduces the risk and increases the yield of the bond portfolio.
We talk about interest rates, talk about them changing, going up and down in the future, so because we don't know what's going to happen with interest rates, we can make our best guess but we don't know for sure, if we have something coming due every year, we are not having everything come due at a really low interest rate or everything come due in a high interest rate, so we can get the best average rate. In the last piece is it can offer diversification, so kind of a smooth income stream and lots of different types of investments as opposed to putting all of your eggs in one basket to use that term.
>> Okay, so I have to assume that there is a tool on WebBroker that can help us create a bond ladder.
Where is it and how do we use it?
>> Of course, yes.
Absolutely, there is a tool. WebBroker has a tool to show us in order to kind of help us go through this process.
So we are going to hop right in and under the research tab, we are going to go to our fixed incomehome page, if you will.
Once we get there, we have an opportunity to kind of choose a bunch of different bonds. We have agency bonds, Canadian municipal , provincial and federal, and then some shorter-term money market securities.
these are quick picks. You can also search of there's something particular we are looking for but for today, let's just go ahead and use that because it's what we have here. If I go ahead, I'm going to randomly go through here and choose a few different bonds.
I will start on the left-hand side. I'm going to choose one that comes due next year.
Now in order to create the portfolio, just click appear, add selection to you and I'm going to choose a new portfolio. Right now, I'm just going to name it July 5, a very original name, and then click add to portfolio.
And then that one has been added. I'm going to go back to home and again, I'm going to click through here, annulling it anything other than maturity dates to make sure that I have them at different times. Again, I need to make sure I select to portfolio. And let me add a couple more here quickly.
I'm not going to choose each individual year, I'm going to stagger them a little bit.
but you're getting an idea as I go into these different portfolios all the different bonds that you can see.
These are the corporate ones.
you can see quite a bit of information here. Again, I'm going to go ahead and choose one. This one is from 2029.
Again July 5.
And then I'm going to choose one more rounded out at five, we will go with the a provincial want to know for the next one.
Nova Scotia, as you know, I'm a Bluenose or sofor our illustration, gotta go with the Nova Scotia when there.
Okay, so here we are.
We've got our portfolio.
This is kind of an idea, it gives us a bit of a picture of where our maturity dates are for some stuff.
However, I'm going to do is I'm actually going to put in a quantity here of how much I would be purchasing of the securities. So just to make it easy, I'm going to put in 10,000 for each. Then I'm going to click the calculate button.
So I want to do now is create a ladder report.
I want to have to quickly share my screen again because I think my pop-up window may not show.
Oh, no, it does. Great.
This is our actual ladder that we are producing.
So this report here… Hopefully it's big enough to see, on the left-hand side, we have information about the different securities, so their names, we have the price we are purchasing them for. They are all priced under 100 which if you are familiar with bonds means that they are selling at a discount. We can see the market value of each one, so we have to pay in order to purchase it which is, again, the total amount we would pay for the portfolio or what it would come duet, sorry. The percentage of the portfolio, so how much each one of the securities is, the yield to maturity, so what we can have is a return per year if we hold it also maturity and then our annual yield as well.
He got the ratings for these individual securities of these credit ratings. The term to maturity, our duration, so how much or what percentage point change in interest rates would impact the value of our portfolio and our total annual income is the last number we have down here, so how much interest we would be getting per year. One last thing I just want to show quickly is this page here which really gives you an idea of kind of how diversified this portfolio is. To the first graphic here is showing us which month we are going to be receiving income.
So we can see that for four months, we are going to have cash flow in coming into our account from this portfolio.
You can see on the right-hand side that we've got diversification, there is municipal bonds, agency bonds, Government of Canada and corporate. So we've got a good mix there.
We have our maturity profile listed here so it's only pulling in four of the five.
We can see that they are well staggered but then our credit rating breakdown, so not rated and AAA are showing there.
So then just kind of a quick overview on the bottom.
The bond ladder report kind of a way for you to build a mock portfolio of bonds before you're ready to purchase them just to see what it might look like.
>> Great stuff as always, Caitlin.
Thanks for that.
>> Thanks, Greg.
> Our thanks to Caitlin Cormier, client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we back to your questions on fixed income for Scott Colbourne, a reminder of how you 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 Scott Colbourne, taking your questions about fixed income.
This one just coming in in the past couple of minutes.
A viewer wants to know, based on uncertainty, it is advisable to lock in a GIC for one or two years?
On the platform, we cannot give investment advice but we can definitely talk about GICs and what we are seeing there and some of the benefits or risks of walking in.
I'm looking on the platform right now looking at one year GICs,one, two and three from issuers as well above 5%.
I can see why the viewers interested.
> There are a variety of instruments and that maturity bucket.
There are GICs, treasury bills, commercial paper, short-term bonds issued by the government of Canada were corporations and there are lots of choices for an investor in that timeframe.
So really, what do you need out of the part of your portfolio?
the locking in part is a view, right?
Or try to make a view on things and that's tough for everybody.
So figure out what you want to do with this part of your portfolio, how much liquidity you want, you want to be casual?
What happens if the market changes and you want to be out of those investments and into something else?
You gotta consider how liquid GICs are.
We are very constructive on short-term government debt as an opportunity that investors should look at.
It covers the same horizon, if you will and they mature and you can do the same sort of thing. If for whatever reason it rates start to go lower, you might get more than just an income return. You might get a bit of capital gain if you invest directly in bonds.
so it's about how you think the portfolio construction, how much liquidity you need in a per year per folio.
It's a great question and it something we'll wrestle with.
>> I think you raised a good point there about GICs and anyone who might be new to GICs as an investment vehicle. If a pullback and you start to see the bond market improve, GICs are just that.
You get her principal back, your interest payment but you're not gonna get any appreciation.
>> Correct.
That's sort of the description.
Price return and income return are the thingsin bond returns.
We can use to raise plunging to low levels. A lot of price return, great bond returns by price appreciation as opposed to the income component.
Now the income component is a greater part and that's driving a lot of return.
> Let's take another question now.
This one is about investment-grade debt. What is the outlook for IG debt right now?
>> Let's continue the conversation from GICs.
As I said, I like investment-grade debt in the short-term market. The front end of the curve that offers attractive government rates plus a coupon and the outlook, it's been very constructive for fixed income this year. The technicals, we call it the supply and demand balance have been very supportive and spreads of come slightly lower over the first half of this year.
Those broad technicals in terms of the amount of bonds that need to be issued,the demand for these bonds are still, broadly speaking, and a good dynamic.
So we are comfortable and obviously just like you talked about the beginning of the interview is you gotta do your homework.
You gotta figure out the outlook for each investment but broadly speaking, this is a good place to put your money.
>> What would be the biggest risk right now to that investment-grade thesis?
Is it the central banks, ultimately, in the end?
>> The biggest risk, you can have substantially higher short-term rates, right?
So inflation is persistent and sticky and you are going to lose a bit of that income which is north of 5% and you are going to use it from price depreciation because yields are going to go up. But at the end of the day, if you are holding individual bonds and you hold them to maturity, your money back.
Your income.
>> Let's take another question now. This one about the bond market.
How is it looking on a geographic basis?
>> It's interesting.
The most attractive spot this year has been local emerging markets. When you look at the compensation or spread relative to Canadian government rates or Canadian investment grade rates, emerging markets were first out of the gate to raise rates and they raised rates a lot. North of 10% generically, in Latin America and in Europe and Africa. Those markets are on pause, a lot of the central banks are on pause. Some are even considering conic rates. So you are getting a credible carry plus some appreciation as yields, as the volatility stabilizes, as markets look for central banks on hold, that is very attractive. So geographically, emerging markets are good.
>> Sometimes a retail investor will take a look at the emerging markets playing through an ETF. It is important when you are doing your homework in the space to see which countries have made which rate moves and that they are not just the same thing in the basket?
>> Yeah, this one is a perfect example of a basket based on an index, we had Russia in the index of local emerging markets at one point, so you've got lots of risks. In the past, with Argentina, a large portion of that they defaulted.
not every index is perfect and not every index… There comes a lot of risk and so for an investor playing local emerging markets, you really have to know your market.
>> We are going to get back your questions for Scott Colbourne 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 can get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions. There are two ways you can get in touch with us. You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
[music] Okay. We are taking a look at TD's advanced dashboard, a platform designed for active traders available through TD Direct Investing.
We are taking a look at the heat map function here. We are getting a view of the market movers.
We are scanning through the TSX 60, we are taking a look at price and we are taking a look at volume.
You can see there's not a lot of green on the screen right now. If we start in the material space, you can see tech resources down to the tune of about 2 1/2% and Wheaton Precious Metals were decided there under a bit of selling pressure. In terms of volume, you can see that Shopify is occupying a certain amount of real estate on the screen.
It is down modestly, a little more than 1%.
If we move over to Algonquin, H.Q., if I have my ticker rate, this is Algonquin Power and utilities. Right now, it seems to be making the biggest move on the 60 to the upside. Fairly solid volume but it's modest, you're up only a little more than 1 1/4%.
We can also check in on the S&P 100.
It's not the only way to screen it through the heat map south of the border.
What do we have on our hands?
Meadow, you can see it down there to the tune of about 3%. They plan to release there is to read the app tomorrow. Supposed to be a Twitter rival according to the App Store on my phone. It should be available for download tomorrow.
it will be linked to the Instagram account. It could be interesting competition for Twitter.
But Twitter has had competition before and it hasn't dented them so it could be an interesting bit of development.
Short of a cage match, these are the two companies that musk and Zuckerberg are heading up.
Few areas of conflict between those gentlemen at this point. In terms of stuff to the downside, Intel not far away, down about 2 1/4%.
You can find more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We are back now with Scott Colbourne from TD Asset Management, getting back to your questions. This one is about your outlook for the loonie.
It's been an interesting year and 1/2 of central bank actions.
>> it's been that way with the US dollar. The US dollar was tradedon a broad range against a variety of currencies.
The Canadian dollar, slightly better. This year you're today, it's applicable percent which is a positive.
We had a tailwind from our economy, we had a tailwind from immigration. There have been a lot of positives at play. Quality markets have softened.
But really, it it's been fairly steady and the Canadian market as a tailwind for the Canadian dollar driven by the interest rate differential between Canada and the United States.
It's been a bit of a steady run.
A lot of viewers hear about the dilemma about the US dollar.
It is at the beginning of the end? I mean, at the margin, there are changes but the likelihood of the US dollar being displaced, it has an important role in trade and commerce, it's a long way away.
It's a very much marginal.
I haven't been one to argue over the demise of the US dollar.
And if the global economy continues to slow down, the US dollar is a countercyclical currency and it generally does better in an environment where things are slowing down or there are risks that play in the market.
And the global economy seems to be transitioning to a lower growth path.
So I'm not giving up on the US dollar. What's that mean for the Canadian dollar?
It's slightly better but because we have similar tailwinds but not a lot better.
>> All of those conversations around dedollarization as they call it. A simple question becomes, if you think this is a short-term or medium-term threat, what do you think this is?
>>China doesn't really have an open capital accounts with small going to be able to play the role.
The euro has been around for a long time and it's played a better role but there is not a lot to replace it.
>> Let's get to another question now.
This is interesting. The debt ceiling was front and sector and and they got past it but this pent-up treasury issuance because of the debt ceiling, is that a risk to the market?
>> It's a really complicated question. It's a great question.
What's going to happen between now and the end of the year is there's going to be $650-$800 billion in T-bill issuance. That is going to have an adjustment that will play out on the Fed's balance sheet. The reserve reverse repos will decline and treasury bill issuance will increase and money market funds will reduce their reverse repos and by treasury bills. How that feeds into quantitative tightening, the central bank tightening that may or may not occur and the issuance and how that affects reserves, reverse repos and bills, is a complicated question. But suffice it to say that the combination of that continues to reduce liquidity available to the market, that will have a headwind for broad risk assets.
There are lots of moving parts in there and it's hard to sort of decisively say that it's an absolute -4 markets.
> This question just came in in the past couple of seconds but I think we can tackle this one off the fly.
We have of you are asking, so the bond issuing company is don't have a credit rating. Should investors be concerned about it when it comes to choosing such a bond?
Maybe to talk about credit ratings in general. What are they actually looking at?
>> Credit rating agencies, Moody's, Finch, D BRS in Canada.
These are all agencies that are paid by issuers of the debt to rate their bonds.
it's one good measure of the assessment of the credit profile of an issuer. You've got to be your own work and you can disagree or agree with that. We do our own independent credit research at our own shop so we sometimes disagree with the rating agencies. An absence of a rating definitely should raise some eyebrows. He doesn't always mean it's bad, it's just at the end of the day, the issuer has to pay for it and sometimes they just choose not to. Who they may be issuing to the debt that may be small private group that are comfortable doing their own work and assigning a rate to it.
it means you have to do more due diligence then you would with ratedsituation. There is investment grade and below investment grade. There's triple being a and above is investment grade debt.
High yield is the opposite and comes with more risk.
>> Always insightful conversations. Appreciate you being here.
>> Pleasure.
>> Our thanks to Scott Colbourne, managing director for active fixed income for TD Asset Management.
Make sure to always do your own research before you make investment decisions. Stay tuned for tomorrow show.
Michael Craig, head of asset allocation for TD Asset Management will be our guest taking your questions about asset allocation.
A reminder that you can get a head start with your questions. Just email moneytalklive@td.com.
That's all the time we have for 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 with the second half of the year may look like for the bond market with Scott Colbourne,managing director of active fixed income at TD Asset Management.
And in today's WebBroker education segment, Caitlin Cormier is going to walk us through how you can create a bond ladder strategy using the platform.
So 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 our guest of the day, let's get you an update on the markets.
The Americans are back at it. Of course, we had our long weekend and so you got trading on Bay Street and Wall Street. We'll start here at home with the TSX Composite Index.
We are down we will call that 92 points are a little less than half a percent among some of the most actively traded names on the TSX at this hours include Osisko Gold Royalties, a fairly substantial pullback in that name.
A release out from the company saying they are searching for a new CEO.
You see the stock down a little more than 11%.
Also moving on fairly heavy volumes is Shopify. To the downside. It had a bit of a run in recent sessions and today at 8467, it's down a little shy about 2%, nothing too dramatic. South of the border, I could say that now they are starting the second half of the year in earnest. They had a long weekend and were off yesterday.
Today on the S&P 500, investors waiting for 2 PM Eastern time, getting the latest Fed minutes. We know it was a pause or skip or whatever you want to call it.
A little more flavoured from around the table as to what they are actually thinking on that front. Got the S&P 500 ahead of that down the benefits of a percent.
Let's check in on the tech heavy NASDAQ. It's pretty much in line with the broader market. Done about 1/10 of a percent.
United Parcel Service, UPS, apparently in talks with the Teamsters union around an impasse. The contract expires at the end of the month. It covers about 340,000 UPS workers. Stock down modestly on that news, and hundred and 80 bucks and change, UPS is down about 1.6%. And that is your market update.
We are past the halfway point of the trading year and many central banks are still signalling there could be more hikes to come to tame inflation. Joining us now to discuss what the current environment looks like the bond market is Scott Colbourne, managing director of active fixed income at TD Asset Management. Welcome back.
>> Thanks. Great to be here.
>> As we had the halfway point of the year, perhaps we are in a situation where the markets a couple of months ago thought we would be.
Central banks might have been done by now, maybe signalling cut. It's a different landscape now where they are still threatening to hike borrowing costs. Had we read it for the bond market?
>> I think we can take a little bit of a lesson from the first half of the year.
When you think back to the beginning of this year, we were quite concerned about recession, inflation. As you pointed out, there was some expectation of a cut at some point.
But you know there were rallies and selloffs, rallies and selloffs in the fixed income market.
At the end of the day, I think we look back and it was sort of what we call an income year first half of the year.
Maybe that is in instructive for the second half of the year as well. It basically you didn't get the big rally, you can get the reliefthat investors are looking for, the pivot out of the central banks, and so maybe this is the playbook for the second half of the year, that we will just have another income type of year, clipping the coupon for the balance of the year as we sort of sorted out these challenges.
Is the recession going to play out?
How many more hikes are left. Central banks in Canada and the US have one to two hikes price in the market.
In that environment, maybe you don't get any relief in terms of a big rally in long rates or short rates but you get an income year which is maybe not what we were looking for at the beginning of the year but it is satisfactory.
>> On the equity side, I talk to investors who are dividend investors, they say, I am getting paid to wait. I'm still collecting those dividend payments.
Same thing in the bond space? You're getting out coupons that you were not getting before all this.
>>yes.
That's why think you have to think about income liquidity and hedging as tools thatfixed income play and for the first time in a long time, we have income and it's a great tool to have.
Yeah, we are paid to wait. If you have some long-duration assets in your portfolio, that might hedge the possibility of a recession.
>> Only talk about the central banks, it's interesting in the fact that although we thought we may be done by now, we were getting strong signals from the Fed that there might be a few more to go, Bank of Canada after surprising last month perhaps has another one for us.
At the same time, I see people say, it might not be over but we are obviously closer to the end of the cycle then we are to the beginning.
How does that set us up going forward?
>> I think that is a fair way of thinking about it.
I will refer to Gov. Tiff Macklem. Basically, headline inflation has come down.
we are concerned about the sticky core inflation and how that plays out. He pointed out that over the course of the next year,going from 3 to 2 is the target. And so that is going to mean central banks, if that plays out, things are steady and there are no big shocks, it's going to be higher for longer in terms of central bank policy. So is it one? Two hikes at the Fed, the BOC?
I don't know.
It doesn't really matter. If you get one more and they are on hold for six months, the type of expectation sort of has to be factored into the market and that will plan to mortgage markets, it will play and portfolios. And at the end of the day, that lends itself to a coupon clipping market.
>> What would it take to knock him off old? If they played out the way it seems it will be done, maybe two more from the Fed, maybe one more or not from the Bank of Canada and they stop.
They have clearly communicate it and said that we are going to get there and hold for a longer period than perhaps the market had been predicting. What knocks them off the course, makes them reverse to mark >> You could get a Goldilocks scenario. All of a sudden, that core inflation just as a wonderful transition to 2% and we continue to have gross and that just gives the central banks who say they are in restricted territory the ability to maybe factor in a cut or she would not give them relief and that is obviously a positive scenario for markets.
You would also get the darker recession. Things cracked, whether it's in the UK or Canada, with housing driven challenges or in other markets.
You have to handicapped as probabilities and those are examples of what could take the Fed and the BOC off the track.
>> Looking at Britain, it's a bit of a different situation given that their headline inflation isn't coming down.
Is that something that is idiosyncratic to the British economy, everything with Brexit and other factors, or do we need to worry about it here?
>> No, I think that's the way to look at it. They've had a lot of idiosyncratic things.
The markets got six more hikes priced in there.
You look around the world and maybe it's a one or two and then you got the UK which is taking the policy rate from where they are now to about 6 1/4.
So it's definitely different than elsewhere and when you look at the early movers which were emerging markets, number of those markets are transitioning to definitely on pause and even raising the possibility of cuts.
So the UK look singularly different than others throughout the world in addition to Japan which is on the opposite side of that.
>> When I think about investors who are hunting for yield, obviously an environment like this, the math kind of changes.
Before all this, the Tina trade. There is no alternative.
People were trying to get some gain for their portfolio.
They were not getting it off coupons. In this environment, obviously you got bonds paying a coupon that they were not paying for a while.
You also have GICs, money market funds.
Was the competitive landscape for investors dollars and where are they flowing to mark >> It's been a great year for fixed income. I know that some people look at the returns as modest or the arguments that you should be in fixed income and it would be the year of fixed income.
Besides that, we had about $120 billion of flows into the fixed income market in the US and a lot of that has gone into the government bond market. Broadly speaking, investors have usedthis adjustment higher in yield as an opportunity to rebalance the portfolio's and add to income and are patient and willing to take it given even if it sticks at the high level and even if it hasn't played out to sort of the playbook that people were looking for at the beginning of this year.
>> Interesting times indeed. We are going to get your questions about fixed income for Scott Colbourne in 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.
Benchmark home prices in greater Vancouver crept higher in June to hit $1.2 million, that's a 1.3% increase from the month before. The local real estate Board says while sales volumes have improved compared to last year, they are still almost 9% lower than the 10 year seasonal average.
These June numbers capture roughly 3 weeks of market activity following the Bank of Canada surprise rate hike on June 7.
Moderna says it has a deal to develop messenger RNA drugs for the Chinese market.
The US drugmaker says they signed a memorandum of understanding with Chinese officials which will see it work towards the research, development and manufacturing of medicine in the country.
That messenger RNA platform is the basis for Moderna's COVID 19. You can see the stock up about 2.8%.
The head of Saudi oil giant Aramco says he's optimistic crude demand will improve once China's economy recovers and the recessionary fears abate. Speaking at an OPEC conference in Vienna, Amin Nasser says China's economy is still picking up but global economic headwinds appear to be everywhere, and that is pressuring crude prices. While he did say he expects demand to improve in the future, he did not give a specific timeframe.
Let's chicken on the market, we will start here at home with the TSX Composite Index. We are down 91 points are little bit less than half a percent.
South of the border, as we await the Fed minutes from the last meeting where they held were skipped or paused or whoever they want to characterize it, we are down a very modest 7 1/2 points, less than 1/5 of a percent.
We are back with Scott Colbourne, take your questions about fixed income.
Let's get to them. Here's one.
The viewer starts off saying, this is difficult to know, but by September or October, not that far off, where do you see the Canadian short term bonds, one to five years, higher or lower than today's date? And how about 1 to 5 year fixed rate mortgages? What we think happens in the short term here?
>> I think the likeliest scenario is that rates are slightly higher in the short end of the market.
I'm not talking substantially higher but that is the likeliest playbook. The Bank of Canada and the Fed indicating to the balance of this year that we will have another hike. It's a 50-50 tossup for the Bank of Canada in July but basically by the end of the year,we will have at least one, maybe two hugs priced into the market. I think that just reinforces essentially and on hold short end of the Canadian bond market.
While we are seeing evidence related to that in the oil story, slowdown, we are definitely seeing it on the manufacturing side, we are starting to slowly creep into the servicing side of the economy.
I think that there is still enough moments and that over the next three months, which is the timeframe for this viewer, that rates will probably be where they are right now. So that means mortgage rates are going to stay roughly where they are.
>> Do we anticipate that when we hit the hold phase for the Fed of the BOC that they would be a hawkish hold?
I imagine there would be some stern words like we might be pausing here, but we have to wait and see.
>> We are not cutting on this pivot. In the next cycle, the rates might be a lot less than previous rate cutting cycles, but I think at the end of the day, they will be communicating what you talked about. It's a hawkish hold. The RBA, the Bank of Australia, has alluded to that this week where they went on hold but they definitely communicated that there are risks to inflation, that we've had a lot of hikes priced in.
All these markets, all of these developed markets have had a tremendous amount of rapid increases. Last July, we were at 1/2% in Canada.
We've come a long way quickly and you have to think that these long and variable lags have to take time to play out in consumers pocketbooks and as corporations refinance and stuff like that.
So it's going to keep things, this hawkish hold mentality as the prevailing narrative in the market. As she mentioned how far we've come in 15 months since we've started hiking. He also said that once you get into a cutting cycle, it's probably not going to take us back to where we were before. Are we in a new sort of environment?
Do people, investors or borrowers or mortgage holders, have dropped their heads around the fact that we are probably not going back to where we were a year and 1/2 ago in terms of rock-bottom borrowing costs?
> I think there's a lot of things that we are trying to get our heads around in this next cycle but it seems that the likelihood is that the cutting cycle may be half of what it has been in the past.
There are many factors at play, de-globalization or supply chain adjustments, the wage market is stickier.
The labour market is still tight but we are going to be loosening up from a very low level so there are a lot of factors that suggest to me that central banks have to be careful in terms of how much they cut.
>> Let's go to another question.
Viewer wants to know your thoughts on the high-yield bond market. You see any opportunities in high yield?
>> So when the year started, the high-yield market was around, yielded 8.75 So you are halfway through the year and your return is just about 5%, so in line with a coupon return with a little bit of compression and spreads, right now we are at may be eight and 1/4, 8 1/2% in the high-yield market. And so if you take the analogy and the playbook that I argued for the beginning of this interview, you're probably going to coupon like returnsthrough the balance of the year and if you are happy with that type of thing, high yield can offer you some returns.
That said, increasingly the risk looks to be more on the downside then a Goldilocks recovery and more likelihood of recession. So there are risks that these spreads might pull that return down to closer to 2 1/2 or 3%.
>> I have heard, and probably from you in conversation about high yield, that if you are thinking about the space, it's not just one basket. We're talking about different issuers and if you need to look at these companies and how their balance sheets might look heading into an economic slowdown.
>> Absolutely.
I just use the generic index and it's an interesting way of thinking about it.
We had this tremendous equity rally and junk is part of high-yield markets with equity like returns.
You have to be very thoughtful if you are buying on an individual basis. Do your homework just as you do in other situations. Let's take another question now.
Plenty coming in for the audience. It when you see wage growth cooling substantially? This is a big part of the equation.
You're worried about services, higher wages and stickiness.
> Yeah, I will go back to the comment.
Macklin said, look, the road that we have to travel from here to the end of next year to get inflation back to 2% is going to be a tough road to travel. And that meansright now, wages are four or 5%. That is not consistent with 2% inflation.
So the trajectory is going to be lower over the course of that year and a bit.
That means that central bank, absent any real negative shocks, is going to be keeping rates higher for longer and it's going to take a while but we just have to come down.
>> This is the first time you and I have had the chance to toxins at the price hike on June 7. They slipped in an interesting line because they have talked before about wage pressures and inflation outlook. They slipped in corporate pricing. What do you think that was all about? Obviously, part of the inflation a picture is when I go out and fill up the car or buy groceries, I am paying more.
>> It's the ability of corporations to pass through price increases to consumers. I think initially pent-up savings from a variety of programs post-COVID have given the developed world and a credible tailwind but the longer rates are held higher and people are refinancing, their budgets get readjusted, those tailwindstaper up.
The capacity of consumers to absorb that corporate pricing behaviour becomes less and less.
So that is something that for the time being they are concerned that corporations are taking advantage of this and passing on prices to consumers.
And that is not a behaviour that they want to reinforce.
>> In my household, how to the pandemic, we went out.
My wife would always ask after trip her meal, how much did that cost? Finally, she said to put on the brakes.
I said, probably good advice.
As always, make sure you do your own research before making any investment decisions.
we will get back to your questions for Scott Colbourne on fixed income in just a moment 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 today.
one income investment strategy may consider screening a bond ladder.
Her to walk us through it is Caitlin Cormier, client education instructor with TD Direct Investing.
>> Bond laddering is an investment strategy or an investor can purchase multiple bonds with different maturity dates staggered over several months or weeks even or most often years.
So the reason that somebody might employ a bond strategy is to improve predictability of future income, so you're making sure that your staggering those payments over a regular basis, ensuring adequate liquidity is maintained for unseen obligations or other investment opportunities, so where we have a bunch of different maturity, we are not waiting for example for five years for everything to come due.
We potentially have something coming due each year so there's a bit more flex ability with liquidity. It also reduces the risk and increases the yield of the bond portfolio.
We talk about interest rates, talk about them changing, going up and down in the future, so because we don't know what's going to happen with interest rates, we can make our best guess but we don't know for sure, if we have something coming due every year, we are not having everything come due at a really low interest rate or everything come due in a high interest rate, so we can get the best average rate. In the last piece is it can offer diversification, so kind of a smooth income stream and lots of different types of investments as opposed to putting all of your eggs in one basket to use that term.
>> Okay, so I have to assume that there is a tool on WebBroker that can help us create a bond ladder.
Where is it and how do we use it?
>> Of course, yes.
Absolutely, there is a tool. WebBroker has a tool to show us in order to kind of help us go through this process.
So we are going to hop right in and under the research tab, we are going to go to our fixed incomehome page, if you will.
Once we get there, we have an opportunity to kind of choose a bunch of different bonds. We have agency bonds, Canadian municipal , provincial and federal, and then some shorter-term money market securities.
these are quick picks. You can also search of there's something particular we are looking for but for today, let's just go ahead and use that because it's what we have here. If I go ahead, I'm going to randomly go through here and choose a few different bonds.
I will start on the left-hand side. I'm going to choose one that comes due next year.
Now in order to create the portfolio, just click appear, add selection to you and I'm going to choose a new portfolio. Right now, I'm just going to name it July 5, a very original name, and then click add to portfolio.
And then that one has been added. I'm going to go back to home and again, I'm going to click through here, annulling it anything other than maturity dates to make sure that I have them at different times. Again, I need to make sure I select to portfolio. And let me add a couple more here quickly.
I'm not going to choose each individual year, I'm going to stagger them a little bit.
but you're getting an idea as I go into these different portfolios all the different bonds that you can see.
These are the corporate ones.
you can see quite a bit of information here. Again, I'm going to go ahead and choose one. This one is from 2029.
Again July 5.
And then I'm going to choose one more rounded out at five, we will go with the a provincial want to know for the next one.
Nova Scotia, as you know, I'm a Bluenose or sofor our illustration, gotta go with the Nova Scotia when there.
Okay, so here we are.
We've got our portfolio.
This is kind of an idea, it gives us a bit of a picture of where our maturity dates are for some stuff.
However, I'm going to do is I'm actually going to put in a quantity here of how much I would be purchasing of the securities. So just to make it easy, I'm going to put in 10,000 for each. Then I'm going to click the calculate button.
So I want to do now is create a ladder report.
I want to have to quickly share my screen again because I think my pop-up window may not show.
Oh, no, it does. Great.
This is our actual ladder that we are producing.
So this report here… Hopefully it's big enough to see, on the left-hand side, we have information about the different securities, so their names, we have the price we are purchasing them for. They are all priced under 100 which if you are familiar with bonds means that they are selling at a discount. We can see the market value of each one, so we have to pay in order to purchase it which is, again, the total amount we would pay for the portfolio or what it would come duet, sorry. The percentage of the portfolio, so how much each one of the securities is, the yield to maturity, so what we can have is a return per year if we hold it also maturity and then our annual yield as well.
He got the ratings for these individual securities of these credit ratings. The term to maturity, our duration, so how much or what percentage point change in interest rates would impact the value of our portfolio and our total annual income is the last number we have down here, so how much interest we would be getting per year. One last thing I just want to show quickly is this page here which really gives you an idea of kind of how diversified this portfolio is. To the first graphic here is showing us which month we are going to be receiving income.
So we can see that for four months, we are going to have cash flow in coming into our account from this portfolio.
You can see on the right-hand side that we've got diversification, there is municipal bonds, agency bonds, Government of Canada and corporate. So we've got a good mix there.
We have our maturity profile listed here so it's only pulling in four of the five.
We can see that they are well staggered but then our credit rating breakdown, so not rated and AAA are showing there.
So then just kind of a quick overview on the bottom.
The bond ladder report kind of a way for you to build a mock portfolio of bonds before you're ready to purchase them just to see what it might look like.
>> Great stuff as always, Caitlin.
Thanks for that.
>> Thanks, Greg.
> Our thanks to Caitlin Cormier, client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we back to your questions on fixed income for Scott Colbourne, a reminder of how you 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 Scott Colbourne, taking your questions about fixed income.
This one just coming in in the past couple of minutes.
A viewer wants to know, based on uncertainty, it is advisable to lock in a GIC for one or two years?
On the platform, we cannot give investment advice but we can definitely talk about GICs and what we are seeing there and some of the benefits or risks of walking in.
I'm looking on the platform right now looking at one year GICs,one, two and three from issuers as well above 5%.
I can see why the viewers interested.
> There are a variety of instruments and that maturity bucket.
There are GICs, treasury bills, commercial paper, short-term bonds issued by the government of Canada were corporations and there are lots of choices for an investor in that timeframe.
So really, what do you need out of the part of your portfolio?
the locking in part is a view, right?
Or try to make a view on things and that's tough for everybody.
So figure out what you want to do with this part of your portfolio, how much liquidity you want, you want to be casual?
What happens if the market changes and you want to be out of those investments and into something else?
You gotta consider how liquid GICs are.
We are very constructive on short-term government debt as an opportunity that investors should look at.
It covers the same horizon, if you will and they mature and you can do the same sort of thing. If for whatever reason it rates start to go lower, you might get more than just an income return. You might get a bit of capital gain if you invest directly in bonds.
so it's about how you think the portfolio construction, how much liquidity you need in a per year per folio.
It's a great question and it something we'll wrestle with.
>> I think you raised a good point there about GICs and anyone who might be new to GICs as an investment vehicle. If a pullback and you start to see the bond market improve, GICs are just that.
You get her principal back, your interest payment but you're not gonna get any appreciation.
>> Correct.
That's sort of the description.
Price return and income return are the thingsin bond returns.
We can use to raise plunging to low levels. A lot of price return, great bond returns by price appreciation as opposed to the income component.
Now the income component is a greater part and that's driving a lot of return.
> Let's take another question now.
This one is about investment-grade debt. What is the outlook for IG debt right now?
>> Let's continue the conversation from GICs.
As I said, I like investment-grade debt in the short-term market. The front end of the curve that offers attractive government rates plus a coupon and the outlook, it's been very constructive for fixed income this year. The technicals, we call it the supply and demand balance have been very supportive and spreads of come slightly lower over the first half of this year.
Those broad technicals in terms of the amount of bonds that need to be issued,the demand for these bonds are still, broadly speaking, and a good dynamic.
So we are comfortable and obviously just like you talked about the beginning of the interview is you gotta do your homework.
You gotta figure out the outlook for each investment but broadly speaking, this is a good place to put your money.
>> What would be the biggest risk right now to that investment-grade thesis?
Is it the central banks, ultimately, in the end?
>> The biggest risk, you can have substantially higher short-term rates, right?
So inflation is persistent and sticky and you are going to lose a bit of that income which is north of 5% and you are going to use it from price depreciation because yields are going to go up. But at the end of the day, if you are holding individual bonds and you hold them to maturity, your money back.
Your income.
>> Let's take another question now. This one about the bond market.
How is it looking on a geographic basis?
>> It's interesting.
The most attractive spot this year has been local emerging markets. When you look at the compensation or spread relative to Canadian government rates or Canadian investment grade rates, emerging markets were first out of the gate to raise rates and they raised rates a lot. North of 10% generically, in Latin America and in Europe and Africa. Those markets are on pause, a lot of the central banks are on pause. Some are even considering conic rates. So you are getting a credible carry plus some appreciation as yields, as the volatility stabilizes, as markets look for central banks on hold, that is very attractive. So geographically, emerging markets are good.
>> Sometimes a retail investor will take a look at the emerging markets playing through an ETF. It is important when you are doing your homework in the space to see which countries have made which rate moves and that they are not just the same thing in the basket?
>> Yeah, this one is a perfect example of a basket based on an index, we had Russia in the index of local emerging markets at one point, so you've got lots of risks. In the past, with Argentina, a large portion of that they defaulted.
not every index is perfect and not every index… There comes a lot of risk and so for an investor playing local emerging markets, you really have to know your market.
>> We are going to get back your questions for Scott Colbourne 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 can get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions. There are two ways you can get in touch with us. You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
[music] Okay. We are taking a look at TD's advanced dashboard, a platform designed for active traders available through TD Direct Investing.
We are taking a look at the heat map function here. We are getting a view of the market movers.
We are scanning through the TSX 60, we are taking a look at price and we are taking a look at volume.
You can see there's not a lot of green on the screen right now. If we start in the material space, you can see tech resources down to the tune of about 2 1/2% and Wheaton Precious Metals were decided there under a bit of selling pressure. In terms of volume, you can see that Shopify is occupying a certain amount of real estate on the screen.
It is down modestly, a little more than 1%.
If we move over to Algonquin, H.Q., if I have my ticker rate, this is Algonquin Power and utilities. Right now, it seems to be making the biggest move on the 60 to the upside. Fairly solid volume but it's modest, you're up only a little more than 1 1/4%.
We can also check in on the S&P 100.
It's not the only way to screen it through the heat map south of the border.
What do we have on our hands?
Meadow, you can see it down there to the tune of about 3%. They plan to release there is to read the app tomorrow. Supposed to be a Twitter rival according to the App Store on my phone. It should be available for download tomorrow.
it will be linked to the Instagram account. It could be interesting competition for Twitter.
But Twitter has had competition before and it hasn't dented them so it could be an interesting bit of development.
Short of a cage match, these are the two companies that musk and Zuckerberg are heading up.
Few areas of conflict between those gentlemen at this point. In terms of stuff to the downside, Intel not far away, down about 2 1/4%.
You can find more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We are back now with Scott Colbourne from TD Asset Management, getting back to your questions. This one is about your outlook for the loonie.
It's been an interesting year and 1/2 of central bank actions.
>> it's been that way with the US dollar. The US dollar was tradedon a broad range against a variety of currencies.
The Canadian dollar, slightly better. This year you're today, it's applicable percent which is a positive.
We had a tailwind from our economy, we had a tailwind from immigration. There have been a lot of positives at play. Quality markets have softened.
But really, it it's been fairly steady and the Canadian market as a tailwind for the Canadian dollar driven by the interest rate differential between Canada and the United States.
It's been a bit of a steady run.
A lot of viewers hear about the dilemma about the US dollar.
It is at the beginning of the end? I mean, at the margin, there are changes but the likelihood of the US dollar being displaced, it has an important role in trade and commerce, it's a long way away.
It's a very much marginal.
I haven't been one to argue over the demise of the US dollar.
And if the global economy continues to slow down, the US dollar is a countercyclical currency and it generally does better in an environment where things are slowing down or there are risks that play in the market.
And the global economy seems to be transitioning to a lower growth path.
So I'm not giving up on the US dollar. What's that mean for the Canadian dollar?
It's slightly better but because we have similar tailwinds but not a lot better.
>> All of those conversations around dedollarization as they call it. A simple question becomes, if you think this is a short-term or medium-term threat, what do you think this is?
>>China doesn't really have an open capital accounts with small going to be able to play the role.
The euro has been around for a long time and it's played a better role but there is not a lot to replace it.
>> Let's get to another question now.
This is interesting. The debt ceiling was front and sector and and they got past it but this pent-up treasury issuance because of the debt ceiling, is that a risk to the market?
>> It's a really complicated question. It's a great question.
What's going to happen between now and the end of the year is there's going to be $650-$800 billion in T-bill issuance. That is going to have an adjustment that will play out on the Fed's balance sheet. The reserve reverse repos will decline and treasury bill issuance will increase and money market funds will reduce their reverse repos and by treasury bills. How that feeds into quantitative tightening, the central bank tightening that may or may not occur and the issuance and how that affects reserves, reverse repos and bills, is a complicated question. But suffice it to say that the combination of that continues to reduce liquidity available to the market, that will have a headwind for broad risk assets.
There are lots of moving parts in there and it's hard to sort of decisively say that it's an absolute -4 markets.
> This question just came in in the past couple of seconds but I think we can tackle this one off the fly.
We have of you are asking, so the bond issuing company is don't have a credit rating. Should investors be concerned about it when it comes to choosing such a bond?
Maybe to talk about credit ratings in general. What are they actually looking at?
>> Credit rating agencies, Moody's, Finch, D BRS in Canada.
These are all agencies that are paid by issuers of the debt to rate their bonds.
it's one good measure of the assessment of the credit profile of an issuer. You've got to be your own work and you can disagree or agree with that. We do our own independent credit research at our own shop so we sometimes disagree with the rating agencies. An absence of a rating definitely should raise some eyebrows. He doesn't always mean it's bad, it's just at the end of the day, the issuer has to pay for it and sometimes they just choose not to. Who they may be issuing to the debt that may be small private group that are comfortable doing their own work and assigning a rate to it.
it means you have to do more due diligence then you would with ratedsituation. There is investment grade and below investment grade. There's triple being a and above is investment grade debt.
High yield is the opposite and comes with more risk.
>> Always insightful conversations. Appreciate you being here.
>> Pleasure.
>> Our thanks to Scott Colbourne, managing director for active fixed income for TD Asset Management.
Make sure to always do your own research before you make investment decisions. Stay tuned for tomorrow show.
Michael Craig, head of asset allocation for TD Asset Management will be our guest taking your questions about asset allocation.
A reminder that you can get a head start with your questions. Just email moneytalklive@td.com.
That's all the time we have for the show today.
Thanks for watching. We will see you tomorrow.
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