It’s no secret that the best you can get in a short term high interest savings account is 1% or less. It’s also clear that many countries in the world are paying negative interest rates on their 3yr or greater government bonds. Historically the yield (or rate of return) on holding bonds increases as the holding period (duration) increases. This is still true in Canada and the US but not in Switzerland, Japan, France, Italy, Germany and a number of other countries. So in many countries the “yield curve” which compares rates of return for different holding periods is flattening or inverting. It has been thought that this is the precursor to a recession – but not so fast says this author.
Link to article.
ON THE OCCASION OF SIMULTANEOUS NEW ALL-TIME HIGHS IN THE DOW, NASDAQ AND THE S&P 500 (AUGUST 12, 2016): “All the money that has ever been “lost” in all the temporary equity market declines of all time has now been returned—albeit to other people: long-term investors with faith in the future, patience, and the discipline to continue working their long-term plan. The tragedy of pessimism is once again complete.” –Nick Murray
Many investors don’t understand the intricacies of bonds and this article covers how bonds work. Bonds are a key part of portfolios (although not as large a part as in days past) but need to be understood – especially in this low interest rate environment.
Why Bonds Are So Confusing
On Dec 17th the US Federal Reserve announced a 25 bps increase in the country’s interest rate. It is the first increase in nearly a decade and it reflects a step by the Fed to bring rates back to a more normal policy environment. While the end of the zero interest rate policy is meaningful, the Fed signaled that they expect to continue to be accommodative and suggests that we should not expect aggressive subsequent moves. This marks a technical return towards rate normalization which will not only raise interest rates but have important economic impacts that have the potential to adjust the investment landscape. But what does this mean to us in Canada?
Typically the wider the gap in Canada’s interest rate as compared to the US, the greater the downward pressure on our dollar. This increases the probability of rate increases in Canada.
With confirmation of a 25bps increase, Yellen has confirmed that the US economy is stable enough to withstand a rate hike. Specifically, the Fed noted that the underutilization of labor resources had improved, the pace of recovery continues to be moderate, and they expect inflation to rise in 2016; all pointing to a gradual but continued improving economy. They also noted that the risk to the economic outlook and labour market are now “balanced” from prior language in earlier meetings where it was “nearly balanced”. Words do matter!
Looking towards 2016 we can continue to expect the same themes as in 2015 to prevail; namely, continued divergence in global monetary policies, continued volatility and slow global growth. In this environment, quality and active stock picking will remain the best strategy as corporate profits soften as one might expect given the strong increases over the last 5 years.
“The Market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” – Warren Buffet