Canadian short-term bond yields have doubled in October, a trend accelerated by a Bank of Canada statement last week that BMO chief economist Doug Porter described as ‘tossing a few more logs on a raging inferno’ of inflation fears.
Two-year bond yields have been so low that the 100 per cent increase still leaves them at just over 1 per cent. Still, the rapid rise in yields raises the spectre of higher mortgage rates that many indebted Canadians might not be able to afford.
Derivative markets responded to the Bank of Canada’s surprise decision last week to abruptly stop quantitative easing by pricing in a 100 per cent probability of a rate hike in January.
Mr. Porter believes this is premature. His forecast calls for the first policy rate increase to 0.50 per cent in mid-2022, followed by 25 basis point hikes per quarter until the pre-pandemic 1.75 per cent level is reached. He admits, however, that “the risk … is earlier liftoff, faster cadence, and ultimately a higher end point” for the Bank of Canada policy rate.
Market-roiling inflation fears are usually accompanied by strong economic growth but this time the growth outlook is being rapidly revised lower. Statistics Canada estimates for third quarter GDP expansion sit near a two per cent annual rate when just three months ago the Bank of Canada was expecting 7.3 per cent.
Investors can take solace in the numerous incorrect predictions of higher rates and yields over the past decade because a market environment of higher rates and slower growth is not a pleasant one to envision. Attractively valued high quality stocks – those representing strong balance sheets and the consistent ability to eke out profit growth no matter what the economic backdrop – are likely to be at a premium in the coming months.
-- Scott Barlow, Globe and Mail market strategist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to Ponder
Shaw Communications Inc. (SJR-B-T) The share price is trading at a significant discount to the price at which Rogers Communications Inc. has agreed to buy the Calgary-based telecom, highlighting an opportunity for investors willing to bet that the deal will close next year. As David Berman tells us, it may be a risk worth taking as the corporate leadership drama continues to unfold at Rogers.
The Rundown
Inflation is here and rate hikes are coming. How should investors get through this changing landscape?
The world’s central banks have been unusually kind to investors over the past year-and-a-half, as low interest rates and other monetary stimulus boosted the appeal of stocks. But the tone is now changing, generating uncertainty over whether the bull market can persist. David Berman takes an in-depth look at what lies ahead.
Also see: How are Canadian portfolio managers preparing for higher interest rates? We asked four of them
Hedge funds’ big short on U.S. bonds just keeps getting bigger
Hedge funds go into this week’s Fed meeting holding one of their gloomiest-ever outlooks for U.S. Treasuries, with the heaviest selling pressure now being cranked up on 10-year bonds. As inflation worries persist, investors are accelerating the pace of bond selling, bond market volatility is soaring, and the longer end of the yield curve is flattening dramatically, even inverting. Jamie McGeever of Reuters reports.
Also see: Why is the U.S. Treasury yield curve flattening and what does it mean?
Women may be better investors than men. Let me mansplain why
Heroes or villains, winners or losers, real or imagined, our iconic investors are very, very male. But that’s a mistake – because it turns out that women are often better at investing. Fidelity offered up the latest evidence this month. Ron Lieber of The New York Times tells us more.
Six things a brutally honest banker would tell you about mortgages, HELOCs and market-linked GICs
The problem with Financial Literacy Month, which just got underway, is that it allows the conversation about smart money habits to be co-opted by the very companies that effectively force us to raise our financial literacy game. Mostly, the big banks. To mark Financial Literacy Month 2021, Rob Carrick presents this list of six things a brutally honest banker would tell you.
Others
John Heinzl’s model dividend growth portfolio as of Oct. 31, 2021
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
After Facebook rebranding, Big Tech’s FAANG considers a change of its own
Globe Advisor
Success is all academic for Canada’s top advisor
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
Ask Globe Investor
Question: I have a tax-free savings account, just because I heard it’s the thing to do with our money. I am 72, husband 73. I really don’t understand how the TFSA works. Do I get a bonus of some kind? Do I pay when I take money out? At our age, do I cash out our RRIF and put it in there? I’m sorry but I just don’t get it. Thank you for any advice you can give us.
Answer: First, let me say that opening a TFSA was the right thing to do, even though you’re not sure why. With all the savings options we have in this country (registered retirement savings plans, registered retirement income funds, TFSAs, life income funds) it’s very easy to get confused about which choice is best.
At your age, the TFSA is the only plan to which you can make contributions. RRSPs have to be collapsed by the end of the year you turn 71 and new contributions to RRIFs and LIFs aren’t allowed.
There are two major differences between an RRSP and a TFSA. A contribution to an RRSP generates a tax deduction, but any money withdrawn is taxed. There is no deduction for a TFSA contribution, but the money can be taken out at any time tax-free.
This makes a TFSA a good choice for seniors who qualify for the guaranteed income supplement (GIS). Most income, including RRSP/RRIF withdrawals, reduces the amount you receive from a GIS payment. A TFSA withdrawal doesn’t do that.
Unless you are in a low tax bracket, I would not advise taking capital from a RRIF to put into a TFSA because you’ll be taxed on any RRIF withdrawal. Rather, use the TFSA for any savings you have. If you don’t need all the money from your required RRIF withdrawals, put it there (up to the legal contribution limit).
Don’t keep the TFSA money in a low-interest savings account. The whole idea of the plan is to invest in securities that pay a decent return, which will be tax-free to you. You’ll find lots of ideas in my Income Investor newsletter.
--Gordon Pape
What’s up in the days ahead
Gordon Pape will present some ETF picks for the environmentally conscious investor.
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff