With uncertainty in the equity markets right now, many investors are wondering where to turn. There are a lot of options when it comes to fixed income securities, including preferred shares, term deposits, bonds, and GICs. However, bonds in particular are finally a solid asset class to invest in again.

Why is this? This article will explain the factors that are driving bond yields higher and explore whether this investment vehicle is right for your portfolio. 

The Current Fixed Income Securities Market

Whether you are a retail investor feeling the pressure from the higher cost of living, or an institutional money manager with a large share of assets in cash, you may be wondering where is the best place to keep your money right now.

Volatility in equity and real estate markets is expected to continue with a global recession a tangible prospect.

Central banks around the world have flooded markets with new money supply, resulting in the highest inflationary environment in the last 40 years. This has caused bond rates to skyrocket. 

As an example, two-year Government of Canada bond yields have gone from 0.50% to 4.10%* in just over a year. That’s nearly an eight-fold increase in just 12 months.

How High are Bond Yields?

What we are witnessing in the bond market right now has not happened for the better part of two decades.

Let’s compare short term bonds (less than five years) issued by Canada’s Big Six banks against the same institutions’ common share dividends and GIC rates.

As you can see, bonds and GICs are outperforming the banks’ common share dividends. This is important because bondholders can make more on an investment that carries significantly less risk. Higher yields in fixed income mean more options for investors.

Take for example, the Royal Bank of Canada. Today an investor can buy their common shares and earn ~ 3.98%* dividend yield. By comparison, a 5yr RBC GIC is now yielding 5.20%* and a 5yr RBC bond has a yield to maturity of ~5.31*.

So, with considerably less risk than owning common shares, an investor can lock in a 25%* return on a major bank bond over a five-year term.

Top 4 Considerations When Investing in Bonds

There are four important considerations when investing in bonds:

1. Price – At inception, bonds are always issued at a price of $100 (also known as par value). The price will vary once they begin trading on the market, but they will also always mature at $100.

2. Coupon – The coupon is the rate of interest that the bond is going to pay to an investor. Normally the coupon rate is fixed, but can also be variable.

   So, for example, if a bond is issued with a 5% coupon, that means it will pay $5 on every $100 worth of that bond from now until maturity. Most coupon payments are made every six months, so in this case, the investor would receive $2.50 on their $100 investment twice per year.

3. Maturity – Unlike equities, bonds have a finite life. On the maturity date of a bond, investors receive their final coupon payment and 100% of their principal.

4. Credit Rating – One of the other great features of bond investing is that most bonds have a credit rating attached to them. These credit ratings help investors know how much risk is associated with lending their money to this company or government. For example, the Province of British Columbia is the only province left in Canada which still has a AAA credit rating.

If you would like to know more or if you have any questions about the topics discussed in this article, call us at 604-643-0101 or email us at cashgroup@cgf.com

*Rates as of November 10, 2022