By Kevin Flanagan, WisdomTree Investments
Special to the Financial Independence Hub
What do almost all major global bond markets have in common thus far in 2019? You guessed it: lower rates. As a result, investors have returned to an environment that could be characterized as “yield challenged” and one that had become all too familiar before last year’s run-up in rates.
Typically, the search for yield comes with added risks as investors either move too far out in duration or lower their credit quality constraints. But what if an investor could enhance yield in their fixed income portfolio while maintaining familiar risk profiles?
Before we focus on a solution, let’s first garner some insights into the Canadian bond market. Similar to the situation south of the border, the Canadian rate outlook going into 2019 was not geared toward a lower rate setting. From a policy perspective, the Bank of Canada (BOC) was projected to continue on its rate hiking path. Prior to the December 2018 U.S. Federal Reserve meeting (the point when expectations began to reveal some change), the implied probability for a BOC rate hike by April was placed around 75% (for those interested, the figure for a rate cut was under 2%). Fast-forward to May 23, and the readings for a rate hike or cut by the end of October are almost split evenly at a little more than 20% each.
CAD 10-Year
How about the Canadian government bond market? As the adjacent graph clearly illustrates, after the 10-Year yield peaked at 2.60% in early October last year, the trend to the downside has been unmistakable. Continue Reading…