A roundup of investment ideas for active investors
The least damaging way to hold fixed income when interest rates are rising is to stick to short-term bonds.
Long-term bonds fall the most in price when rates rise, a point that is driven home nicely by the performance of the BMO Long Federal Bond Index ETF . The loss for the 12 months to Feb. 28 was 16.2 per cent, bad enough to drag the annualized five-year result to a loss of 1.8 per cent.Here’s what: When interest rates level off and begin to fall, ZFL is an ideal way to play the rebound.
Prior to the SVB collapse, there was already reason for optimism that long bonds have rebound potential. We started 2023 with expectations of lower rates‚ which then turned to concern that inflation wasn’t going away as quickly as hoped. Bonds gained some ground, and then lost most of it. Still, ZFL was up 1.4 per cent for the first two months of the year. That’s better than the broad Canadian bond market, which was up 1 per cent.
ZFL is vulnerable if inflation is sticky enough to require further interest rate hikes. Whatever declines there are in the broad bond market will be magnified in ZFL. But for a total return based on unit price changes plus bond interest, ZFL looks interesting. By the way, the after-fee yield to maturity for ZFL is about 3.1 per cent. That’s lower than the broad bond market, a quirk resulting from the fact that shorter-term bonds yield more than longer term bonds right now. This inverted yield curve is common when markets worry about recession risk.
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