Bonds – A market in trouble

02 November 2018 by Jean-Philippe Bernard
Bonds – A market in trouble

For three years, bond returns have been struggling with headwinds. For investors, purchasing bonds has always been synonymous with security and an effective bulwark against the volatility of equities. Moreover, if you look at returns for the past 15 years, they have provided stable growth that is sufficiently high to beat inflation. 

However, over the past three years, the situation has changed. As proof, here is the performance of the Canadian bond market, as measured by the FTSE TMX Canada Universe Bond Index as at October 2, 2018:

 

Year 2018

1 year

3 years

FTSE TMX - Canadian Bonds

-1.02

1.15

1.14


Given that many investors have a bond component in their portfolio, this has therefore been a source of underperformance for three years.

For a conservative portfolio with between 55 to 70% of holdings allotted to fixed income (bonds), the impact was naturally higher than for a growth-type portfolio (15 to 30% allocation). As such, more cautious investment approaches have possibly resulted in disappointment and questioning regarding the weak returns. Is this the right strategy to adopt considering that U.S. equities, as measured by the S&P500 Index, have been churning out annualized returns over 15% for the past three years?

What is your strategy?

In a diversified portfolio, the difficulties experienced by bonds have been partially offset by the solid showing by equities. It is important for cautious investors to keep in mind why they chose such a profile. Cautious investing is often associated first and foremost with seeking lower risk and preserving capital at the cost of lower returns.

For three years, a cautious approach has continued to generate positive returns that can keep pace with inflation. In short, the goal of safeguarding capital against eroding purchasing power has been accomplished. Cautious diversification has done its job and looking to change strategies to copy the high returns seen on stock indexes could result in taking risks that are not compatible with your objectives.

Corrections to be made?

Ask yourself the following question: Setting aside the quest for higher returns, am I prepared to take more risks to get them? Certain tools will allow you to better understand whether your current positioning is suitable or needs to be revised. 

Jean-Philippe Bernard is an advisor with National Bank Financial. National Bank Financial is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). The opinions expressed herein do not necessarily reflect those of National Bank Financial. The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The securities and sectors mentioned in this document are not suitable for all types of investors and should not be considered as recommendations. Please contact your Investment Advisor to find out if a security or sector is suitable for you and to obtain more information, including the main risk factors.

Legal disclaimer

The articles and information on this website are protected by the copyright laws in effect in Canada or other countries, as applicable. The copyrights on the articles and information may belong to the National Bank of Canada, its subsidiaries or other persons. Any reproduction, redistribution, communication by telecommunication, including indirectly via a hyperlink, or any other use thereof that is not explicitly authorized, of all or part of these articles and information, is prohibited without the prior written consent of the copyright owner.

The content of this Web site is provided for general information purposes and should not be interpreted, considered or used as if it were financial, legal, fiscal, or other advice in any way. In addition, the information presented on this Web site, whether financial, fiscal or regulatory, may not be valid outside the province of Quebec.

This article is provided by National Bank Direct Brokerage (NBDB) for information purposes only. It creates no legal or contractual obligation for NBDB and the details of this service offering and the conditions herein are subject to change.

The hyperlinks in this article may redirect to external websites not administered by NBDB. NBDB cannot be held liable for the content of external websites.

Views expressed in this article are those of the person being interviewed. They do not necessarily reflect the opinions of NBDB.

Categories

Categories