Market Insights

In response to the unprecedented speed of rate hikes and tumbling bond valuations, many investors have turned to GICs for their attractive yields and capital preservation. However, with inflation moderating, we believe investors should consider looking beyond GICs and pivot back to bonds, particularly Active Credit, which can offer higher yields, capital preservation, and portfolio diversification.

Bond markets are extremely attractive from an all-in-yield perspective, and we genuinely believe the current opportunity set in fixed income provides investors with an excellent entry point. Nonetheless, the valuation dispersion across and within asset classes requires a tactical approach to identify and exploit the best risk-adjusted opportunities.

P&C firms face more complex investment decisions than most institutions due to regulatory capital guidelines, but now must re-evaluate their investment playbook in the context of today’s market volatility and weaker macroeconomic outlook. Based on the three P&C investment dimensions: return, risk, and capital charge, we believe P&C insurers can benefit from the relative opportunity in high-quality Active Credit, providing a better risk-reward profile.

In the 2023 Federal Budget released in late-March, a surprising tax measure was proposed, where Canadian insurers will be expected to pay the full tax rate for common and preferred share dividends, treating them as ordinary business income. We believe losing the tax advantage of these instruments gives insurance companies another good reason to rethink their preferred share allocations. We believe actively managed fixed income solutions can deliver better risk-adjusted returns for P&C firms, with a much lower capital requirement.

There is no denying that the income is back in fixed income. Investors may feel compelled to lock in attractive bond yields by overweighting portfolios to certain securities. However, we believe the still uncertain market backdrop calls for a more balanced approach when constructing a bond portfolio.

At RPIA, we believe risk management and hedging are critical elements of corporate credit investing. We seek to understand the varying risks in each underlying portfolio with precision, and then sell or hedge the specific sources of risk if our investors are not being adequately compensated for the cost of bearing them. In this paper, we review how we address explicit and unforeseen risks through our hedging program.

Financial instability and uncertainty from the bank liquidity crisis ignited further volatility in bond yields in the first quarter of the year. As we continue to monitor the far-reaching implications of recent events on growth and markets, we’ve recognized some opportunities amid the credit risk repricing.

The unprecedented volatility in bond markets over the past two years has resulted in many bonds trading at discounts to their par values. These bonds can offer a tax-efficient approach to generating returns for investors over the coming years. We explain this through a hypothetical scenario and by comparing the after-tax returns for discount bonds vs. GICs.

2023 has been a year marked by extremes. In early March, the market was fixated on the possibility of central banks having to increase the “terminal rate,” but the collapse of Silicon Valley Bank and the potential financial contagion risks that emerged from it, resulted in the quickest interest rate repricing in nearly 40 years. We discuss our views on the impact on the financials sector specifically and the market environment broadly.

As the year begins on a hopeful note, the shift away from artificially low interest rates and liquidity-flushed markets is making this a credit-pickers market once again. In this newsletter, we discuss how our game plan is evolving and the emphasize need to be flexible, selective, and targeted in this environment.

For years, businesses have been discussing the changes in consumer behaviour as younger generations become decision-makers; the same is true for wealth and investment management. We are in the midst of the largest wealth transfer in history – by 2030, American women will likely control $30 trillion of inherited financial assets from baby boomers. What does this mean for those helping families manage their wealth?

Following the softening in policy stance from the Bank of Canada, domestic bond yields have moved lower in recent weeks, and we see signs of potential stabilization at home. South of the border, the US market raised its overnight rate by 75pbs on November 2nd and has now priced in another 125bps of rate hikes by early 2023, increasing the expected terminal rate to over 5.25%. We believe interest rates are now sufficiently restrictive to slow the economy and the income opportunity is very compelling while providing significant safety for investors today.

Market volatility, inflation, and geopolitical developments have all made for a cloudy bond market. However, we are seeing the silver lining from an attractive running yield, dislocation across sectors and geographies, and improved opportunities in security selection.

Given the recent market volatility, YTD 2022 has been an extremely challenging period for fixed income as central banks began tighter monetary regimes. As a result, bond yields spiked, sending bond prices plummeting. This created an opportunity for fixed income investors to purchase bonds and GICs at the most attractive yield levels, and many are now wondering if they should use GICs instead of bonds as a source of safe income.

Although the independence of DIY investing can seem appealing, we believe that investors should reflect on these key themes and potential challenges that exist with achieving diversification, managing, and maintaining bond portfolios cost, and the potential impact of taxes. A qualified investment manager that specializes in bond portfolios can help investors navigate this established asset class in a way that can help achieve investor objectives across market environments.

July saw central banks continue their fastest and most aggressive monetary tightening in recent history. However, we believe some of the volatility that we saw during the first half of the year may be beginning to dissipate and signs of improvement may be on the horizon for fixed income investors. Against this improving backdrop, we have seen credit spread volatility fall and believe there are interesting opportunities that didn't exist at the beginning of 2022 that can deliver strong returns for our portfolios.

Living in unprecedented times has become the norm since the pandemic took hold in early 2020, and just when the light at the end of the tunnel begins to shine through, another set of obstructions materialize. We are familiar with the current impediments – inflation running at four-decade highs, escalating geopolitical risks, and a harsh monetary policy regime purposely restricting economic growth. Altogether, we believe this may be a recipe for a recession – but what kind of recession?

We are pleased to announce the launch of our new strategy, RP Broad Corporate Bond (Fossil Fuel Exclusion), designed in partnership with our client, University of Toronto Asset Management (UTAM), and in collaboration with FTSE Russell. Learn more about the strategy and how the first-of-its-kind screening approach was developed!

In the past few years, we've seen ESG-labeled bonds benefiting from a cost advantage that became known as the "greenium." As the ESG bond market has grown, we've noticed this "greenium" fade as the market matures and the advantages ESG bond issuers once had becomes tied to the ambition of their projects, not just the label of their bond.

Since the beginning of 2021, bond holdings have posted double-digit losses and weighed down portfolio performance. However, as is often the case in markets, with pain comes opportunity. Despite the potential for continued short-term volatility, we believe the time to increase bond allocations for intermediate and long-term investors is now.