Bonds are the best buy-low opportunity around right now.
Stocks wobbled a bit in April, but 2024 thus far is a continuation of a strong multi-year run. As for bonds, well, it’s shocking how bad they’ve been over the past five years.
The FTSE Canada Universe Bond Index was down 0.9 per cent for the 12 months to April 30, down 2.2 per cent on an annualized basis over the past three years and down an annualized 0.1 per cent over the past five years (all figures include interest income payouts). Just lately, bonds have kicked a bit higher. This explains how a $10,000 investment made five years ago in the index would have been worth $10,079 late this week.
Encouragement to keep the faith in bonds seems in order here. When the economy slows and interest rates come down, bonds will do better. They would also likely benefit if stocks correct.
Investors, much to their credit, seem to grasp this. Inflows of money into fixed income exchange-traded funds have been strong in recent weeks. Not as strong as the flow of money into equity funds, but impressively high nonetheless. When bonds rally, people buying in now will get a nice total return based on bond interest plus gains in bond prices.
To see how this might happen, take a look back at what happened in 2023. The FTSE Canada Universe Bond Index gained 6.7 per cent on expectations that inflation would cool and interest rates would fall. Inflation’s resilience this year has undone these gains and contributed to those atrocious five-year numbers.
The risk with buying bonds now is that inflation fears cause further declines in prices. The ETF industry is waking up to investor trepidation about losing money in bond funds and has been rolling out a growing number of target maturity bond funds.
Conventional bond funds ride interest rate cycles indefinitely, rising in price when rates fall and falling in price when rates rise. We’re in a high rate period now, so bond ETFs have been hammered. Investors who hold on will see a turnaround, but that’s not much solace when you’re looking at your account and seeing bond ETFs way in the red.
Target maturity bond ETFs hold a diversified portfolio of bonds, just like all bond ETFs, and their prices do fluctuate. Where they differ is in maturing on a set date, just like an actual bond. It’s much easier to tolerate paper losses in a bond ETF if you know you’ll get your money back at maturity. RBC Global Asset Management introduced target maturity bonds in 2011 and lately, TD Asset Management and Guardian Capital have introduced them as well.
Other options for bond-wary investors include guaranteed investment certificates and money market funds, which hold short-term corporate and government borrowings. But neither GICs nor money market funds offer the rebound potential of bonds.
-- Rob Carrick, personal finance columnist
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