This year has been extremely difficult for global stock as markets have struggled with inflation fears, rising interest rates, the Russia-Ukraine War, and lingering effects of the COVID-19 pandemic. In North America, every major index is negative on the year. The TSX is the breadwinner with a whopping -7.24% return YTD and the biggest loser being the NASDAQ at -27.32%.

With a sombre outlook on growth in the near-term, investors are struggling to find a safe place to invest any capital. It seems that nearly every asset class is facing economic headwinds with continued pressure on global supply chains and increasing interest rates putting a squeeze on access to cheap money. One interesting outcome of the current economic environment is the impact on yields in the fixed income market (government treasuries, corporate bonds, GICs, etc.). These investment vehicles which used to be the foundation of most investment portfolios had historically low returns throughout the pandemic while stocks saw all-time highs.

However, in March 2022, something significant occurred, the two-year yield on both Canadian and US treasuries crossed over the dividend yield for the S&P Aristocrat Index (index of the highest paying dividends in the S&P). Investors can now capture yield without being vulnerable to the price risk of the underlying stock and fixed income is beginning to show value again.

The yields on government treasuries act as a proxy for other types of fixed income securities including corporate bonds and, in Canada, Guaranteed Investment Certificates (GICs). Just a year ago, a one-year GIC would yield an investor approximately 0.80%, whereas today you can secure a rate for over 3% at a major bank.

So, why is a shift in yield happening?

Simply put, this shift is occurring because of inflation. Central banks have been forced to aggressively raise rates to combat rising inflation which in turn has sharply increased fixed income yields. This is also occurring at the same time there has been serious turbulence in the financial markets with some companies dropping almost 90% from their 2021 highs.

What is the downside of fixed income?

At the very least, these fixed income products are now becoming a viable solution to shelter a portion of your portfolio and still earn a return as opposed to sitting strictly in cash. At the Cash Management Group, we pride ourselves on offering the best rates on fixed income products in the country.

If you have any questions about today’s Market Update, you can call us at 604-643-0101 or email cashgroup@cgf.com