Bonds on the rise: Understanding the recent surge

by Scott Ronalds

It might surprise you to hear that bonds are up 13% over the past year (ending September 30). Even better, our Income Fund is up nearly 15%. To understand this welcome turnaround, a little recent history is helpful.

A rocky road post-pandemic

Bonds had a rough stretch coming out of the pandemic. Yields sat at rock-bottom levels throughout 2021 after central banks around the world aggressively cut interest rates to support ailing economies. Investors had soured on the asset class and the bond market turned in its first negative year since 2013, falling nearly 3% (as measured by the Morningstar Canada Core Bond Index).

Then, in the spring of 2022, central banks began raising interest rates to combat soaring inflation and overheated parts of the economy. The Bank of Canada increased its key policy rate from 0.25% in March to 4.25% by year-end. Bond yields rose across the maturity spectrum. The 10-year Government of Canada yield, for example, climbed from 1.5% to over 3.5%. These moves were massive in bond terms, and the market fell nearly 12% in the year, one of its worst showings in memory. It’s important to remember that when interest rates rise, bond prices typically fall (and vice versa).

But it was an extraordinary time in history. The global economy was essentially shut down for the first time, only to be supercharged by ultra-low rates. Inflation reached levels many Canadians have never seen, and central bankers were subsequently prompted to hike interest rates at a swift pace.

Stabilization and recovery

These rate increases began to slow last year, however, and bonds regained their footing. The market was up 6% in 2023, with all the gain coming late in the year (the index was up 8% in the fourth quarter) as consensus started to build that the rate hiking cycle was nearing its end.

The asset class has been solid this year too, up 4.1% so far, albeit all the gain has come in the third quarter, when the market was up 4.6%. This strong recent return, when added to the heady figure from Q4 2023, accounts for the stellar 12-month number.

The Bank of Canada cut its policy rate in June for the first time in over four years and has implemented two more cuts since (bringing it down from 5.0% to 4.25%). Bond yields have fallen commensurately. The Bank has indicated that more cuts are likely if the economy cools further and inflation continues to trend down towards its target of 2%. The U.S. Federal Reserve has indicated the same, although nothing is written in stone.

Outlook

This environment of easing interest rates bodes well for future returns. Indeed, over the medium term (five years), we expect bonds to return 4-6% per year.

With short-term rates declining, investors are earning less on money market holdings and GICs. If the fixed income portion of your portfolio is heavily weighted in these securities in lieu of bonds, it’s a good time to consider rebalancing. In our Founders Fund, we’ve increased our bond weighting in recent quarters with the improving fundamentals. Our weighting has risen from a low of 25% in early 2022 to its current level of 33%, which is just under our long-term target of 35%.

Despite the rough stretch, bonds are earning their keep again and balanced investors can feel good about the diversification and income benefits they provide.

Management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The indicated rates of return are the historical annual total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns.

Bradley's Brief — Q3 2024

by Tom Bradley

In a recent Globe and Mail column titled The Loneliness of the Long-term Investor, I outlined the importance of having a strategy and routine that can be sustained for a long period of time. I suggested that it can be a lonely endeavour. The media implores you to make changes, friends boast of big stock wins, and unpredictable markets make it hard to sleep some nights.

Well, I want to clarify something. My loneliness piece was written for readers of the Saturday Globe, most of which aren’t Steadyhand clients. For you, it doesn’t have to be so lonely. Steadyhand is designed to make it much easier to execute on the four recommendations in the article that will build up your endurance and help with the loneliness. Let me explain.

Have realistic expectations. When times are good, we’re preparing clients for when they won’t be so good. We want you to be ready for the toughest time in the market cycle, when stock prices are down, and emotions are up.

Our favourite tool on the website is the Volatility Meter, which shows that every four or five years an all-equity portfolio will be down. For a balanced portfolio like the Founders Fund, it’s every 7-10 years (Founders has had two negative years since its inception in 2012).

If anything, we’re too much of a downer in our communications (me at least), which is lousy marketing to be sure, but it has kept our clients grounded and is a big reason why more top up their contributions than bail out when markets are scary.

Have a clear goal for each bucket of money. This is something our Investor Specialists do well. They know there are no right answers without understanding the purpose. Money invested to provide a retirement income decades from now is vastly different than money being set aside for a down payment.

Pursue a strategy you can sustain no matter what’s going on in your life. We only ask that you invest some time when getting started (we have lots of questions) and stay in touch with what’s going on. To help, our communications are easy to understand and have a regular rhythm; our approachable, knowledgeable professionals are available to answer questions and provide advice; and our core funds (Founders and Builders) make adjustments for you as needed.

Speaking of adjustments, we’ve done some rebalancing in the Founders Fund this year in light of the hot markets. We’ve trimmed stocks to stay close to our long-term target and edged up the bond weighting to reflect an improved fixed income outlook. We dig further into what we’ve been doing in our Q3 Report, which I encourage you to read.

And finally, make sure your support system is in sync with your approach. You want a steady hand when things are going poorly (see company name), not an easy off-ramp that throws you to the investment industry wolves. Industry studies show that investors don’t do nearly as well as the funds they invest in because they chase past performance, trade too much, and buy high/sell low. Our clients’ returns, on the other hand, closely track our fund returns. Our clients keep their goals in mind, stick to their plan, and have a shoulder to lean on along the way.