Tag Archives: GICs

Cash Alternatives: Bond ETFs and other Vehicles

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Image Deposit Photos

By Alizay Fatema, CFA 

(Sponsor Content)

Central banks across the globe are likely to continue with their attempts to tame inflation by hiking interest rates, crushing the hope that markets will return to normality any time soon.

With the unemployment rate at a historically low level, inflation remains a top concern for the Bank of Canada (BoC) and the Federal Reserve (Fed), who are also dealing with looming risk of a recession and uncertainty regarding the impacts of the recent bank turbulence. The BoC and the Fed appear to be ahead of global peers in their attempt to slowdown inflation – raising the question around whether we have seen the peak in rates in North America.

The rapid tightening cycles by policy makers are reinforcing the appeal of owning high-
quality ultra-short bond, and money market ETFs. A series of recent rate hikes by the Bank of Canada and the Federal Reserve gave a boost to yields for these products, making the saying “cash is king” true to a certain extent, as investors who are worried about higher inflation and slowing growth prefer investing in these cash alternatives to ride out the market volatility. In today’s market, you can earn an attractive yield while taking less risk – earning while you wait for volatility to subside.

Yield curve[1], are we in love with the shape of you?

Normally, the yield curve is upward sloping, meaning longer-term bonds yield more than shorter-term bonds as investors often demand higher yields for locking their money up for a longer period. However, at present, the shape of the yield curve is inverted, which means shorter-term securities are yielding more than longer-term ones. This inversion is largely owing to the Central Bank’s quest to reduce inflation by hiking the interest rates.

Due to historically low interest rates in the last few years, investors were compelled to take more duration[2] risk by adding exposure to longer-term bonds and higher credit risk[3] by investing in lower credit quality segments such as high-yield or emerging markets bonds. However, due to the current yield curve inversion, the tables have turned now, offering a unique opportunity for fixed-income investors looking to earn higher yields.

Source: Bloomberg USYC3M10 Index (Sell 3 Month US T-bill & Buy 10 Year US Bond Yield Spread) Sep 1992 to April 2023

Why stash cash in money market & ultra-short-term bond ETFs?

The front-end of the yield curve (0-1yr) offers an attractive asymmetry and opportunity to capture yield between 4-5% + with limited duration and credit risk. This allows investors to earn the highest yields we’ve seen in more than a decade on fixed income and build a more stable high-quality fixed-income portfolio by adding exposure to ultra-short investment grade bonds and money market securities. Based on the current interest-rate volatility, hugging the front-end of the curve seems a more prudent and consistent way to preserve capital in a fixed-income allocation. BMO ETFs offers solutions such as BMO Money Market Fund ETF Series (ZMMK), BMO Ultra Short-Term Bond ETF (ZST) and BMO Ultra Short-Term US Bond ETF (ZUS), which are a great way to get exposure to the front end of the curve.

These money market & ultra short-term bond ETFs invest in high credit-quality instruments that provide a great degree of safety and capital preservation. Firstly, by investing in securities that mature in less than one year, the duration risk is minimal, which results in lower interest rate sensitivity in your portfolio. Secondly, these ETFs offer high liquidity[4] due to the nature of their underlying securities, which means they can be bought and sold easily with minimal market impact. Continue Reading…

Rate Hike hiatus?

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

Late in January, the Bank of Canada boosted rates by another 0.25% and signalled that they will now pause and evaluate. I’ve been calling that the rate hike hiatus. As I touched on in mid-January, inflation is moving in the right direction and the consumer is holding up quite well. It’s a Goldilocks scenario, for now. That said, the rate hikes have not worked their way through the economy. In fact, many suggest that we’ve felt almost no economic damage from the rate hikes. There is a lag affect; it can take a year or two for hikes to be felt in full. But let’s call the rate hike hiatus good news.

The big news last month was the announced rate hike hiatus in Canada. Of course, markets are forward “thinking” and they are pricing in a soft landing and rate cuts in 2023. That Yahoo!Finance post suggest that cuts are likely not on the table this year. That would only happen if something breaks and we get a serious-enough recession. Also, inflation would have to be completly under control. The Bank of Canada is not likely to cut rates if inflation is not close to that 2% target.

Rate guesses, not so good …

The consensus appears to be the call that there will be no rate cuts in 2023, though there is a sprinkling of calls for cuts in late 2023. And all said, we should remember the rate predictions from March.  Not even close.

Inflation is so unpredicatable. And inflation might still be driving the bus in 2023.

Coming in for a landing

Lance Roberts looks at the history of soft landing and hard landings. There were 3 past soft landing scenarios, but none in an inflationary environment. The affect of rate hikes have largely not been felt, and likely have had little push on inflation. But that will come over time of course.

Here’s the chart that shows the positive effect of a weak U.S. Dollar for international equities. With bonds looking better and the potential for international markets, the traditional balanced portfolio might ‘be back’ one day soon.

A Weak Dollar Bodes Well For Non-U.S. Equities – ⁦@SoberLook⁩ ⁦@bcaresearch⁩

Originally tweeted by Rob Hager (@Rob_Hager) on January 24, 2023.

Stacking those dividends

Dividend Daddy knows how to stack and count those dividends.

Here is a popular tweet on the simple basics of wealth creation and the path to financial happiness … Continue Reading…

The seven money myths that stand in the way of a good financial plan

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Financial Literacy Month is natural moment for a reality check-up

By Jennifer Cook, EPD, PFA, PFA™, QAFP™

For the Financial Independence Hub

On the path to financial security, there are natural peaks and valleys that can be navigated via the help of a good advisor.  It’s the map in the form of a personal plan that can help guide an individual toward their goals, whether it is saving for a house, planning for retirement or protecting against unforeseen events.  But more than any other hazard along the journey, is when road signs are misread or misunderstood.

Financial literacy is key to unlocking an individual’s ability to realize their dreams, and that is why Financial Literacy Month in November is so important to us at Co-operators.  It’s a moment for all of us to fill in some of the gaps in our knowledge about planning.

Many of us have developed habits or rely on inherited ideas about finances, so I look at financial literacy as an opportunity to put to rest some of the myths that can affect good financial planning.

As Canadians face year-end decisions on investments, taxes, and RRSPs, we at Co-operators have identified common gaps in financial preparedness stemming from the spread of money myths. There are many myths that can derail planning, but I’d like to talk about the top seven and offer a remedy in the form of a reality.

Myth 1: Saving is safe. Investing is risky.

Reality: As Canadians feel the impact of raising interest rates and inflation, it’s tempting to embrace the idea of “safe” or “lower-risk” investment options. But this strategy comes with a risk of considerable lost earning power. Investing in a diversified portfolio that matches individual needs with the help of a Financial Advisor can build long-term returns, while managing risk.

Myth 2: Single, young people don’t need insurance.

Reality: No one is free from the risk of loss or liability. When budgets are tight, tenant or renters’ insurance can provide critical coverage for unforeseen events like theft, fire, or water damage. Young people can also take advantage of lower insurance rates that provide continuing benefits as their lives develop and their needs grow.

Myth 3: RRSP season starts in mid-February.

Reality: Though the typical RRSP frenzy may suggest otherwise, there is no rule that says lump sum payments must be made to RRSPs before the annual March 1 deadline. Canadians can contribute to their RRSPs (up to individual contribution maximums) at any time of the year. The March 1 date is used to determine how tax benefits will apply to the previous year’s income. Depending on a person’s situation, a Financial Advisor may recommend contributing smaller amounts to an RRSP on a weekly, bi-weekly, or monthly basis.

Myth 4: Those who invest in mutual funds have sufficiently diversified portfolios.

Reality: Today’s spectrum of mutual funds is widespread. It’s not easy to gauge whether an individual investor is appropriately diversified. And that can leave some people vulnerable to losses from sectors. Leveraging the expertise of a Financial Advisor can help investors make nuanced adjustments to ensure their portfolio has the right balance of diversification aligned with their risk tolerance. Continue Reading…

Revenge Travel in the post-Covid era, global Market Volatility, US mid-terms, Confidence Man

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Malaga, Spain. Image by Pixels: Oleksandr Pidvalnyi

By the time you read this, I should be in Malaga, Spain, where we’re spending a few weeks. Call this our version of what Robb Engen described in yesterday’s Hub as “Revenge Travel” in the post-Covid era.

I realize that the term post-Covid is hardly an apt one as, from where I sit, Covid and its ever-propagating new variants seem ever with us.

Back in 2020 and 2021, it seemed Covid was something a friend of a friend of a friend contracted: these days, it’s more likely to be a next-door neighbour, friends or family, or perhaps the person staring you in the mirror in the morning. This is not a time to be complacent: I still believe in being cautious, keeping vaccinated and boosted to the max, social distancing in public places, and masking wherever there are significant gatherings.

One thing we noticed early in this trip to Spain is a higher use of masks than in North America: masks are still mandatory or highly encouraged on public transit, trains and for air travel. Last week, the Washington Post and other papers warned of a resurgent Covid wave, possibly coupled with the ordinary Flu and other respiratory viruses, constituting a dreaded possible “tridemic.”

I’m writing this as a grab-bag of recent items. As per usual, the Hub will be publishing every business day, with the help of the many generous financial bloggers who grant permission to republish their excellent insights. You know who you are! (Looking at you, Robb Engen, Bob Lai, Michael Wiener (aka James), Dale Roberts, Kyle Prevost, Mark Seed, Pat McKeough, Steve Lowrie, Adrian Mastracci, Noah Solomon, Anita Bruinsma, Mark Venning, Fritz Gilbert, Billy and Akaisha Kaderli, Beau Peters, Victoria Davis, Emily Roberts, and occasional others, including our regular Sponsor bloggers.)

I do of course  have wireless access and my laptop while abroad, and am at least partly plugged into the blogosphere and markets. As I wrote recently in my monthly MoneySense Retired Money column, 2022 has been a challenging one for investors: even those holding a version of the classic 60/40 Balanced portfolio. Pretty distressing to see both sides of the stock/bond pendulum falling!

Are GICs the answer to the Fixed-income Rout?

I see Gordon Pape commenting recently in the Globe & Mail [paywall] about the fact that most investors will be looking at significant losses this year, unless they were mostly in energy stocks, GICs or short the market. He suggested 1-year GICs paying around 4.5% are one possible remedy. After last week’s Bank of Canada rate 0.5% rate hike, you can now get 5% or more on 5-year GICs, so it seems an apt time to start building or rebuilding 5-year GIC ladders. The way I figure it, the BOC will hike again at the end of the year, perhaps 0.25% or at most 0.5%, and perhaps once or twice in 2023. But if they do succeed in restraining inflation, then that will be that: if rates top out maybe 0.5% more from here and then start to fall again, you may end up kicking yourself for not locking in 5% for 5 years or as long as you can find. This is assuming you are building a ladder and reinvesting prior GICs every quarter or so: as long as SOME money is coming due every three or four months, the locking-in factor is less of a negative.

But before going overboard on GICs, read Robb Engen’s recent blog  at Boomer & Echo: The Trouble with GICs. Robb has an issue with locking your money up for 5 years: an Asset Allocation ETF can do much the same thing if things become normal again, with instant liquidity.

Of course, as many of our guest bloggers have been noting recently, it’s also a good time to “dollar-cost average” your way into high-quality decent-yielding Canadian and US dividend stocks, which to some extent I also have been doing. Continue Reading…

Get Income at the Short End

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Franklin Templeton/iStock

By Brian Calder,

Franklin Bissett Investment Management

(Sponsor Content)

Nowhere to run to, nowhere to hide: that could be the description of the 2022 investor year. It has been a difficult 2022, and many investors are looking to enhance their cash positions while preserving capital, given market volatility and rising interest rates. In this environment of high inflation, higher rates, and slow economic growth, an ultra-short duration bond strategy could be timely.

The major equity and bond markets have been hit hard this year by geopolitical shocks, fallout from the COVID-19 pandemic, and sluggish growth. Rapid and aggressive moves by major central banks to increase interest rates resulted in a flat or inverted bond yield curve and contributed to elevated market volatility. An inverted yield curve means that interest rates on short-term bonds are higher than those of long-term bonds. For instance, on October 6, 2022, the yield on the three-month Government of Canada bond was around 3.68%, while the yield on the 10-year Government of Canada bond was 3.34%.

An inverted yield curve is often seen as a pessimistic market signal about the prospects for the wider economy in the near term. Bond markets have priced in even more interest rate hikes from central banks like the Bank of Canada and the U.S. Federal Reserve.

So, rather than thinking about being ‘ahead of the curve,’ it may be time for investors to be at the front of the curve.

These challenging market conditions are ideal for an ultra-short-duration bond strategy. Duration is a number that’s used to measure how sensitive a bond’s price is to changes in interest rates:  how much the price is likely to change as rates change. The longer the duration, the greater the sensitivity to shifts in interest rates for a bond. Understanding the use of duration can help an investor determine the position of bonds in a portfolio.

Time for short-term thinking

At the front end of the federal government bond yield curve, opportunities are available for investors because the curve remains flat in the middle and at the back end. A yield comparison of the Canadian market as of August 31, 2022, showed that an ultra-short duration strategy outperformed three-month Treasury bills and was competitive with one-year to three-year government bonds. Because short-term yields are less sensitive to rate hikes, they can be more protected and stable, plus they are not as exposed to potential drawdowns like those seen in strategies with longer-term exposures.

Also, an ultra-short duration strategy can be less volatile than longer bonds (see chart).

 

Continue Reading…