Scott Colbourne

[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.

Every day, I'll be joined by guests from across TD, many of whom you'll only see here.

We're going to take you through what's moving the markets and answer your questions about investing.

coming up on today show, we are focusing in on the fixed income markets. With the Bank of Canada pausing in the fed signalling marks to come, what does this all mean for the bond market?

We'll discuss with Scott Colbourne from TD Asset Management. And in today's WebBroker education segment, we will talk to Nugwa Haruna about the WebBroker platform.

Before you get to the guest of the day, let's get you an update on the market. We will start here on Bay Street with the TSX Composite Index. Modestly in negative territory the last time I looked.

Indeed, down about 27 points.

27 points below breakeven. A little more than 1/10 of a percent. I did notice some energy names getting a bit today, the price of crude is calming a little.

it's a bit of relief for the sector.

Cenovus Energy up 2.7%.

also noticing some risk appetite out there after Jerome Powell cast a bit of a shadow over the market earlier this week.

Got Shopify starting to give up its gains of the session. It's still in positive territory but it was from earlier on.

Right now it's up about 1 1/3 of a percent as investors work through these macro themes to figure out where we are headed.

South of the border, less checking in on the S&P 500.

It's up 1/10 of a percent, a little less than four points. The tech heavy NASDAQ, we saw some risk appetite and the tech names, so it's a bit firmer but not too impressive to the upside. Up 27 point, about 1/4 of a percent. One of the tech names, noticing the chipmakers getting a bid including Intel, which is a bit of an under performer for the group, and today it's up about 3%. And that is your market update.

It has been a busy week for central bank officials. On Wednesday, the Bank of Canada Wednesday To banks on hold. Then you have said chair Jerome Powell testifying before lawmakers in Washington that US rates could go even higher than previously expected to tame inflation paired so what does it all mean for the fixed income market?

Scott Colbourne, managing director of active fixed income at TD Asset Management is here today. Quite a week for people who discussfixed income.

That's what we are talking about right now. All the central bank action, all this divergence.

Maybe we will start with the US because they push the markets a little bit more than the Bank of Canada does.

>> I guess we are in a data dependent environment right now and we are seeing slight divergences in that theme. We start with the US and the Fedand chair Powell's comments this week, basically introduced the option analogy that maybe they go up 50 basis points at the next meeting.

We got two key pieces of data, so the data dependency focus, tomorrow we've got the payrolls in the next week we've got CEPI.

So basically, the Fed told us, look, the data is coming in a little bit stronger-than-expected.

We are going to probably, we are going, they are definitely going to raise the rates but they are getting themselves the optimality of if the data comes in stronger to introduce a pace that is greater than 25 basis points. And so that is, you know, describing that environment.

It really is an uncertain environment.

You step from the Fed and then you look around the world, there is this uncertainty associated with where we are, this inflationary environment out there.

Every country out there is dealing with it.

Do we, in the Bank of Canada, we are on a conditional pause. And so it is conditional on the data evolving.

And that is the uncertain world that we are all dealing with, whether it's a policymaker or investors.

And it is challenging for all of us to really navigate a narrow road, the volatility and uncertainty associated with this environment.

>> Heading into this year, there were investors sort of feeling a little bit more constructive I guess the word would be about the fixed income space. At some point, after the year we had last year, the aggressive rate hikes, the central banks will find the endpoint and terminal rate. They might stay there for a while, but at some point, because it is restricted territory, they should start cutting.

We are only two months into the year and a little bit into the third month. What are we thinking about fixed income given what we are getting recently from all the central banks?

>> Generally speaking, we are constructive on fixed income. We can dive into that.

But broadly speaking, I think given the back of the yields, there are enough opportunities, whether it's across the yield curve or sectors, to participate and certainly from a longer perspective given some of the post-GSC world we have been in, we do have income for the first time in a long time, so fixed income. That hasn't been available to us given the fact that it was so close to zero for such a long time. So it is generally speaking a positive environment. That said, the uncertainty associated with inflation and the history teaches us that rapid turnaround for the push from rapid rate hikes that we've had in the challenge that we had last year in 2022 to rapidly expect to pivot by the central bank this year. I think history teaches us that there is a lot more caution warranted from a policymaker point of view that the risk for them is to err on the side of caution and stay tighter for longer.

And so we begin the year and they were rapidly pricing in rate cuts this year and then obviously a lot more into next year.

I think it's pretty clear that given the trajectory of inflation will come down has elements of stickiness and there is a need to be patient from a policymaker's point of view.

> And maybe even patient from an investment point of view.

He pointed to the fact that finally you are actually getting a coupon, some yield on fixed income that perhaps it makes sense, that you're being paid to wait.

I was so this is interesting as an investor. If you are in equities, you have a dividend paid stock. You could be patient for the dividend. But we are now getting yield with fixed income. At least the coupon is giving us something.

>> The nice thing with fixed income is that there is a mathematics behind it. I don't want to go into the weeds… >> Get out the whiteboard.

>> Generally speaking,you buy into your bond. It's yielding 5%, say, in the US.

You are going to get 5% for the year.

You are paid 5%. Rates could go up more, but the income that you are getting is going to offset the decline that's associated with the interest rates. So it's not just the price of the bond moving up and down that is your return, it's a combination of the two. With bond mathematics, you can give yourself scenarios.

Are we at a breakeven point? Could rates go up 50 basis points? You're holding a 10 year bond right now and you have is your return for the year?

Yeah.

That's an important part of thinking through allocation of fixed income and that income is an important part of that scenario analysis in your portfolio.

> Last year, I think some of the frustration from people was I given the fact that central banks were hiking so aggressively, it did look great on the bond returns or the equity returns. So the idea of the 6040 or 7030, everybody wants to spice it up, people are wondering if it works anymore.

But the scenario you're laying out right now, at least the fixed income part of the portfolio is providing some buffer.

>> Yeah.

We went through a generational shock last year associated with policies that came out of a pandemic that we, none of us have been through in the impulse for monetary policy and fiscal policy caused a rapid increase in inflation and policymakers had to respond, equities and fixed income went through a long generational shock.

Now we are transitioning from that rapid adjustmenthike in interest rates and we are dealing with a stabilization at least in fiscal policy.

So we can expect a portfolio, 6040 portfolio, to play a role now given the fact that fixed income. We talked about fixed income playing a few roles.

income is one. Liquidity is important. If you rebalance that fixed income into equities or whatever you want.

but it's also diversification or the role that it plays to counterbalance.

And so on days when equities are down, we are seeing is more evidence that equities can balance that 6040 portfolio no.

>> Fascinating stuff and a great start to the show.

You're going to get your questions but fixed income Scott Colbourne in just a moment's time. A reminder that you can get in touch with us anytime.

email moneytalklive@td.

com or follow the viewer response box on WebBroker.

Now that you updated on top stories in the world of business and take a look at how the markets are trading.

General Motors is offering voluntary buyouts the majority of its office staff in the United States.

The move comes as the automaker targets tobillion dollars in cost savings in the next two years. The voluntary separation program was announced in the memo from CEO Mary Barra. Just last week, GM said it was looking to cut some 500salary jobs total.

They are down about 2%. Ligatures of Silvergate Capital in the spotlight today, that after the Couture currency lender said it would wind down its operations and liquidate Silvergate Bank. The move follows the implosion of crypto exchange FTX, which has sent shockwaves through the industry.

Legates dealings with FTX are part of the a Justice Department investigation.

Credit Suisse is delaying the release of its annual report. This was bank says it received a call from the US securities exchange commission last night regarding a cash flow statements. Credit Suisse says management believes it's prudent to delay the annual reports we can better understand the comments received from the SEC. Let's get you an update on the market. The TSX Composite Index is down about 1/5 of a percent.

South of the border, the S&P 500, lots of big macro concern for investors to stew over.

Right now you're modestly down to the tune of about three point, just seven tics.

We are back now with Scott Colbourne, take your questions about fixed income here let's get to them.

Here's the first one out of the gate. If interest rates stay high, what does that mean for bonds and stocks?

>> If interest rates stay where they are, sort of stay on change, it is an opportunity to earn that income that we have just talked about.

We talked about in the US, 5% two years, 4% in 10 years and that's US government.

And then obviously for corporate bonds, you earn an income rental yield on that.

So if interest rates to stay where they are, you are going to earn 5% plus on the front-end and you are going to earn 4% or more holding long-duration assets. So that is, you know, a positive for investors.

And given earnings yields in the equity markets as a contrast to what's in your portfolio, I think it's a positive. So even in a sort of sideways market on hold, if you will, it's really important to have fixed income in your portfolio, given that sort of on hold aspect of the portfolio.

>> The Fed made it pretty clear that they have further to go. The Bank of Canada did hold on its conditional pause. It would've been strange if they said conditional pause in one meeting and in the next meeting it was your off pause again.

But in this environment, when we are talking about fixed income and with the bankruptcy right now, they are pretty it clear that they are in restrictive territory. Some were generally speaking, what should we expect from rates in the years going forward?

They were down to zero because of the pandemic and for years, the central bank struggled to sort of stoke any inflation at all in the economy. I feel like we are in a different place now.

>> Yeah, we have transition from an environment that had inflation that was sort of managed for a variety of reasons, globalization, disinflation. We are in an environment post-pandemic that we've had a lot of shocks, geopolitical, energy, labour market shocks. Policy -induced shocks. So the trajectory for inflation is probably higher and secure. So we expect inflationto come down a lot this year but we also expected to be higher than where we have been used to in post-GSC. So you expect central banks to be mindful of that and watch the trajectory of where inflation is going.

So we expect the Fed to raise rates probably another 75 or 100 basis points this year.

But that is not an incremental, after this week, it is not a lot of incremental new news.

But what will be news is if we continue to see data come out over the next month, quarter, that continues to push service sector inflation higher and the labour market tighter or the economy re-accelerates. That would sort of embedded more hikes into it. So for the time being, what we got right now and what the bond market is telling you is that we've got another 75 or 100 basis points by the Fed priced into the market at current levels and we've got about possibly another 25 basis points by the Bank of Canada, which may or may not transpire.

But that's what's priced into the markets.

So we are going to, you know, it's an important part of the portfolio and you're being paid that incremental income right now and for the first time in a long time, that breakeven analysis isn't positive for a lot of investors.

Put aside the possibility of a scenario of a hard landing or I've talked about the re-acceleration but there's also the downside that we can see to re-acceleration.

A deceleration in inflation, a decline in not a growth, and having long-duration fixed income assets would help you perform.

>> Solicits another question now. This one is about bond ETF's.

With bond ETFs, does the price change based on trading activity similar to stocks, we talked about a demand for certain equities, or is it purely based on bond market prices?

>> Generally speaking, it is predominantly bond market prices that are predominant drivers and ETFs.

Occasionally, given huge inflows and outflows, you see that in the US, the Navajo of the ETF relative to the value of the assets move to a premium or discount as things are, as the transaction sort of unfolds in the market.

And you occasionally get that at stress points, whether it's positive or negative stress.

So you get a deviation. And you see that in the credit market a little bit. So high yield ETFs, those would be an example that to a lesser extent the investment grade credit market.

But broadly speaking, the vast majority of the movement that you see in an ETF is just simply captured by the fact that it's an upward and downward adjustment in prices of bonds.

>> Given that, if you have an investor trying to figure out whether they want to play fixed income actually through fixed income securities or whether they want to play it through bond ETFs, are there important distinctions to have on their mind?

The one that sticks out to me is that there is much higher entry fee to get into fixed income, like a pure government bond, I think it's about five grand on WebBroker, as opposed to a mutual fund.

Are there other things to consider?

>> Yeah, that's an obvious candidate.

From that point of view, there's the crudity.

You can transact an ETF anytime of the day with lots of… Especially the size, if it's a smaller thing. Sometimes, occasionally, there is a premium discount that you have to pay attention to. That's important.

The liquidity associated with owning a bond, I mean, it's gotten much, much better and I think you can buy, the transaction sizes a little bit bigger, but owning it to maturity makes a ton of sense.

And as occasionally if you move into the investment grade credit market, there might be a wider bid ask associated with selling a corporate bond if you own the individual name. Pluses and minuses. If you are holding it to maturity, it really doesn't matter.

Right? So just a matter of getting the timing right, buying the portfolio versus the liquidity that's provided for you in the ETF market.

>> Let's get to another question now from the audience. This one is a a bit about politics in Washington. How worried should investors be about the debt ceiling in the US?

Is this a coming up kind of event, coming up the summer?

>> It has the potential to be a really difficult moment for the markets.

the US government has the potential to default on its debt. Given the rhetoric and the tone and the animosity that you see across the aisle in the US, there is scope for a mistake to be made here.

This is not the purview of the Fed.

>> The one thing where the central bank can't rush to the rescue.

>> Powell made it clear yesterday, this is not us.

They can help in the backdrop was some liquidity.

An accident on terms of defaulting beyond the mechanics in which cash flows are adjusted into that sort of dropdead date which is a bit of a movable date so I can give you date right now but let's call it in the summer sometime, this is really potentially important.

It was, in 2011, it was a huge market moving event for the government bond market.

While it has the potential to be quite unsettling, I hope that we can navigate this one.

But that is definitely something you don't want to see is the government defaulting on their debt.

>> Details still to come as we had closer to the summer. As always, make sure you do your own research before making any investment decisions. we will be back with your questions for Scott Colbourne on fixed income and just most 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.

Investors who purchase fixed income products on WebBroker such as bonds and GICs it may be unfamiliar with high yield bonds.

Nugwa Haruna, Senior client education instructor at TD Direct Investing joins us with more.

Always good to see you.

Let's talk about how investors can find the types of bonds on WebBroker.

>> Speaking about bonds, when it comes to the way, an investor is lending money to a corporation or the government and they expect at the end of that lifetime of that bond to receive their whole principal or face value back. What tends to happen, just as yourself and Scott were discussing, was that investors can decide to buy-in to bonds before they mature. And the investor might not receive the full face value. They may sell at a discount.

They may be sold at a premium.

They tend to be sold at a deep discount before they mature.

Let's show investors where they can find this.

So once in WebBroker, you can click on research. Under investments, we will go fixed income. So the fixed income page in WebBroker essentially gives you an idea about what the secondary market looks like.

These are certified preowned bonds already.

But if you want to find a listing of high-yield bonds, you can find them just at the top here.

High-yield. I'm going to right click to pull that up in a new tab.

You can just click on it and it will appear on your screen.

So the reason these are called high-yield compared to regular bonds,, that's because these tend to sell at a deep discount compared to their face value as compared to regular bonds. The reason for this would be that these bonds tend to be rated lower when it comes to some of the leading credit rating agencies.

For instance, bonds will be considered high-yield or another name would be junk bonds… The rating agency rates them B+ or lower. You will notice that the bonds on this list are double B+ or lower.

Let's focus on one of those bonds give you an idea of how they work. So we focus on this bond I've highlighted on the screen, you will see the coupon rate is 6%. This bond matures in 2030, so seven years down the line.

This bond right now is trading for $76, face value bonds is 100, select a steep discount.

So an investor could purchase this bond at $76. When the bond matures, if the issuer is able to return your principal, the investor would get 6% for every 7672 they had spent.

This coupon payment of 6% is based off the face value of the bond.

So technically for an investor purchases this bond at the specific market price right now, they will be receiving… If they hold this bond until maturity. Once again, investors want to remember that these are called high-yield bonds.

It's because the risk of default is higher than other bonds.

>> All right, so now we know where to do our homework, Nugwa. If someone is intrigued and wants to use the platform to place a trade for high-yield bond, how would they do that?

>> Right, so when it comes to high-yield bonds, you will notice I pulled up a separate sheet of paper on screen and that's because to purchase these, investors would need to call, to see information about where to call, I'm just going to increase the size here. If you scroll down, you will see the phone number down here.

So investors can give the TD Direct Investing desk a call to purchase these bonds.

So alternatively, investors may consider things like… Exchange traded funds when it comes to fixed income, and investors can actually find high yield fixed income here. Let's hop into WebBroker.

Once in WebBroker, an investor will click on research. Under investments, since we are focusing on ETFs right now, we will click on ETFs.

Depending on what exchange the investor is interested in, we will focus on the US markets right now.

I'm just going to look on categories over here.

And once I do that, I brought to the list of different categories here, I'm just going to scroll down to find our high yield bond category and there it is.

So there are 82 ETFs on a US exchange that call themselves high yield bond funds.

So if I click on here, we are brought to the page where these funds are listed. We are able to scroll down.

Here you see what their objective is.

Most importantly, investors who are thinking of investing in high-yield are generally doing so because they are seeking to get just that, high-yield.

Investors can actually use this little break down here that gives you an idea of the distribution yield and the funds in this category that have the highest distribution yield.

They can get an idea of potentially kinds of funds they want to ask for. I will mention the risks when it comes to utilizing high-yield bonds in any portfolios that the risk of default is higher. The company or government may not be able to pay this interest payments were return your full principle.

If investors are aware of these risks and decide they do want to invest, these are different ways they can access them in WebBroker.

>> Great stuff as always. Thanks for that.

>> It's always a pleasure being here.

>> Our thanks to Nugwa Haruna, senior client education instructor at TD Direct Investing.

And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.

now before you get back your questions about 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. We are taking your questions about fixed income, so let's get back to them.

Plenty coming in right now. What areas of fixed income, long-term or short-term bonds, variable or fixed rate preferred shares, does your guest like for potential capital gain?

>>there's I think the opportunity said it's really interesting.

so we will go with yield and talk about the opportunities. I would say that there'san opportunity to be invested at the very front-end, particularly buying high quality corporate names.

You could be both investment-grade or high-yield the very front-end of the yield curve.

We talked about 5% as a benchmark for two years and then you're going to get a guild on top of that.

So holding that type of return for a couple of years makes a ton of sense to mean for some portion of your portfolio.

But there's not a ton of capital gains associated with that.

So if that is exclusively what you're focusing on, then you are really making a focus on the outcome of the economy and where it might go.

And the greatest bang for your buck is if the economy turns down and we see a recession play out or a significant deceleration in the rate of inflation. I'm a fan of going out further in the yield curve for the potentialcapital gains with longer duration assets.

A 30 year bond has a duration of 20, 21 years, that means that for every movement and interest rates by 100 basis points, you can't a 20, 21% potential capital gain.

So that gives you the bond mathematics associated with a 30 year rate decline of about a percent can give you that type of capital gain return.

Am I handicapping that right now? Not as much, >> It's a recession kind of call, right?

>> Yes. If you are focused on capital gains,that's the but you're making, that you're gonna get a lot of bang for your buck.

>> A question about small investors investing in fixed income.many of the fixed income insurance have a high minimum amount, so how can they get in and get some exposure?

>> There is a diversified mutual fund or through an ETF and you can get your exposure that way and it's the same construct in terms of income as well as potential interest rate movements.

that's the best way for small investors to get in. Or alternatively another solution which is more broadly diversified a and it's rebalanced and it has a focus, our asset allocation team has a lot of unique solutions on that side of things.

So if you don't have the minimum, then those are the avenues that I would suggest.

>> We are going to get to another question now.

Hey, rolled back to that lesson.

Here's a fresh one.

If an investor is expecting sticky inflation with the short-term two-year floating-rate notes make sense?

>> Sticky inflation means we are on hold for longer with the potential of, as Gov.

Powell said, we could be raising rates 25 or 50 basis points or even more.

So you're going to be resetting depending on how long the sticky inflation lasts at a higher variable rate.

So it's a headwind.

I would say that if you are able to compound and finance at 6%, then that's a positive but the potential with sticky inflation is that it goes up more.

>> We are going to park your questions for Scott Colbourne on fixed income in just a moment's time.

As always, make sure you do your own research before making any investment decisions.

and a reminder that you get in touch with us at any time.

Do you have a question about investing or what's driving the markets?

Our guests are eager to hear what's on your mind, so send us your questions.

There are two ways you can get in touch with us.

You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker.

Just write in your question and hit send.

We'll see if one of our guests can get you the answer right here at MoneyTalk Live.

At the start of this year, there was a lot of eyeballs on China's economic reopening and the recovery was shaping up to look pretty impressive and rapid.

We have some recent economic news casting doubt on this recovery. Anthony Okolie has been looking at a new TD Securities report on all this.

>> Consumer prices in China climbed 1% year-over-year in February, that's a pullback from the 2.1% we saw back in January.

It's also below the consensus estimates of 1.7%. Now, this reading was actually the slowest pace of growth since February last year. We look at core inflation, it ease from 1% year-over-year 2.6% in February.

Now of course, driving that decline, we saw some softer food and services demand after the lunar new year, according to TD Securities.

The weaker than expected inflation data comes after China reported some lacklustre trade figures for the first two months of this year.

In fact, exports got off to a weak start, falling 6.8% in January and February, versus one year ago.

Imports fell even faster by more than 10% year-over-year. The drop in exports was impacted by slowing global demand and with the US and other developed nationssignalling higher interest rates for longer to battle inflation, that could continue to her demand for Chinese made goods like furniture and electronics going forward.

Now the softening export sector also creates uncertainty for the broader Chinese economy.

It recently Chinese leaders set a conservative growth target of 5% for 2023.

That is versus expectations of a target range of 5.5% by TD Securities. Now, this growth target comes after COVID lockdowns and government induced properties lump curved growth last year to 3% in China.

Now, TD Securities interpreted the GDP target as a sign that authorities may be curbing expectations for further stimulus reloads this year.

And even though China's zero COVID policy engendered a sharp decline in manufacturing output, questions remain about the sustainability of this rebound.

>> Interesting stuff. Given all that, any thoughts on monetary policy? We talked so much about China coming out of COVID restrictions, the economic bounds, we haven't talked much about monetary policy.

>> TD Securities believes that China will maintain a targeted stance on monetary policy. They see scope for your further slight easing in China's base lending rate or the lower crime rate in weeks ahead. TD Securities concludes that open-market operations, these are the tools that China's central bank uses to manage its monetary policy, it suggests that the peoples Bank of China wants to keep liquidity ample in supportof the economic recovery.

>> Interesting stuff. Thanks.

>> My pleasure. Money talks Anthony Okolie.

Let's check in on the markets right now, see what's going on on Bay Street with the TSX Composite Index. Modestly negative at the top of the show. Right now, it's doing to the tune of about 25 points,A little more than 1/10 of a percent.

got Crescent Point up one and 1/2%. Maple Leaf Foods is an interesting one coming up with his quarterly report.

the forecast seems to be disappointing the street. You're down 8 1/2% on Maple Leaf Foods right now. South of the border, the S&P 500, it's green but very modest.

Three points seven takes. How about the tech heavy NASDAQ? It's faring about the same. It's given up a lot of gains from earlier in the session. It sitting on the breakeven line right now.

Let's check in on Chevron, barely hanging in there as well.

Investors are trying to make sense of this environment and work through the same big macro seems together.

Back to your questions about active fixed income for Scott Colbourne.

Can you just explain bond duration and how it relates to term?

>> Okay.

You have to help me on this.

You have to help me in terms of making sure I'm keeping it honest and simple.

it's a really important measure in the bond world.

And so you'll get your returnFTX ways.

You get your return through price movements and you get your return through income.

So incomeis essentially the yields that we have the market. Whether it's 4% in Canada for two years or 5% for the US for two years, that is your income.

If you hold that to maturity, that is your return over those two years.

Both years, you get 4% or 5% in Canada.

That's important.

But as we all know, interest rates move.

We can't explain why interest rates are moving. So there's a whole yield curve and sensitivities to interest rates and day-to-day changes in interest rates and duration is a measure that allows us to understand the sensitivity at different points of the yield curve to movements in yields that are on a day-to-day basis.

So to year bonds, just for the sake of simplicity, call it a two-year duration.

So if interest rates one hundred basis points at the two-year point, you would lose 2%.

From a price point of view immediately.

The income, though, is 4% or 5% depending on where you are in Canada or the US. So that offsets the movement in prices.

You move out to the five year, the tenure, the 30 year, you have greater sensitivities, the ration aspect of it, to movements in yields, just given the fact that those cash flows the bones have are discounted over a longer period of time.

So I mentioned earlier that we have 30 year bonds that have a 20 year duration.

So movements of 100 basis points at the 30 year marked have a greater impact of the lifetime of that bond and hence the sensitivity or the duration of that is greater.

So an increase in interest rates of 100 basis points, you could lose, on a price basis, 20% and vice versa if interest rates fell.

So it's a measure of the sensitivity of the price of that bond to movements in interest rates at that point along the yield curve that allows for all of the bonds outstanding to adjust on a day-to-day basis to make the bond liquid.

I hope that… >> It very clear. I was worried off the top.

You said, Greg, help me out here.

>> I just want you to keep me on the straight and narrow.

>> I will say my definition is what Scott said.

Let's take another question from the audience. The emerging markets, what is your take on emerging-market bonds?

>>two ways of looking at it.

There is a what we would call hard currency, so emerging markets issued in US dollars predominantly euros to a lesser extent so you can invest in Mexico, Brazil, Indonesia, currency that is hard for US dollar denominated.

For me, that's an extended opportunity set when you compare against corporate bonds.

Some are investment-grade and some are below investment grade so as an investor, you just decide the compensation and the outlook for the country. The interesting point is, and this feeds into the cycle and where we are, is what we call local emerging-market debt that is debt issued in the local market of the company and has a currency of the country as well and to the extent that at some point, over the course of this year, that we think the US dollar has peaked, the Fed stepped back from accelerated rate hikes, that is a positive tailwind for emerging-market currencies, non-US dollar currencies, so you would get a lift from the emerging market currency exposure and then you had to have exposure to local market rates and in some cases they are very attractive.

Mexico, 10, 11% in the short term part of the market, Brazil, even a little higher than that.

So there are interesting opportunities in a well diversified portfolio for this.

> We had a couple of questions come in earlier that we will rocket through here before the end of the show.

One of our viewers want to know, high-yield bonds. They want to think about sectors they need to avoid. As Nugwa was explaining, high-yield means more risk.

We think about that in terms of sectors as well?

>> Just like anywhere, you can look at sectors. So if you are handicapping a downturn in the economy, cyclical aspects of the market will be more sensitive to the downturn in economic activity, whether it's autos or consumer discretionary sectors.

So you do definitely have to worry about it as part of your analysis of high-yield bonds.

Big picture, high-yield debt, particularly when the index is north of 7 1/2%, it's a great place to invest with lower volatility than the equity market, but definitely do your homework on sectors.

Even with a challenging environment, there are companies that are going to have short high-yield bonds that will be refinanced and they will mature, but you really have to pick and you definitely have to consider sectors.

>> A few more to go through before the end of the show.

You knew you were going to get a question about GICs before the show was over.

Will GIC rates still go up?

What are GIC rates moving off of?

> Same impact as the bond markets.

So the Fed raises rates, that has a deliberate to the government rates.

That affect the wholesale market. It's a function of how much more do interest rates go up from here and I sort of handicapped maybe another possible 25 Basis Points in Canada that possibly priced into the market.

That's a possibility and what you are saying is actually some stability and long-term interest rates.

So longer-term GIC rates might not go up even if you get another 25 basis points.

So as a function of what's going on in the bond market and what's priced into the bond market.

>> One more. What percentage of the portfolio should bonds be? What should they represent?

I have a feeling that it is one of those depends who you are questions.

>> My 25-year-old daughter or mean, Ray?

It depends on how you structure your portfolio and what you're trying to achieve and how much capital you want to put at risk.

Obviously, equities play a great role and so do alternatives. You got a diversified portfolio, fixed income ebbs and flows in right now it's attractive for investors across peace.

My 25-year-old daughter to myself in structuring your portfolio.

So I'm gonna take the easy route out and say it depends but the 6040 rule was an example of an all weather approach to managing your portfolio. I think it's a lot more sophisticated than that.

The older you get, you typically have more income.

>> Scott, always a pleasure to have you here. I look forward to next time.

>> My pleasure.

>> Our thanks to Scott Colbourne, managing director of active fixed income at TD Asset Management.

stay tuned, on tomorrow, we will have the highlights from the week.

There's also the jobs report in the US. On Monday, we heard Anthony Okolie talking about China's economy, so we will be bringing back Haining Zha on Monday from TD Asset Management. If you have any questions, just email moneytalklive@td.com. That's all the time however the show today. Thanks for watching. We will see you tomorrow.

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