Long Term Bond Yields at Record Lows

With this week's losses in global equity markets, we're seeing the yields on long-term bonds fall to record lows. As investors flee equity markets, the price of low-risk assets like long-term US and Canada bonds gets pushed upwards, and yields correspondingly fall.

30-Year Bond Yields Below Financial Crisis Levels

Below is the yield on Canadian 30-year bonds, which reached 1.298% yesterday:

Source: Bloomberg, February 27th

And the yield on US 30-year bonds, which broke all-time records to reach 1.768%:

Source: Bloomberg, February 27th

As you can see, bond yields are currently hitting record lows, in line with a global trend of falling rates. Rates in Europe have been at or below 0% for some time now, as investors deem the low risk to be worth accepting negative returns. 

Bank of Canada Rate Probabilities

On next Wednesday (March 4th) the Bank of Canada will announce its policy rates. Below are the probabilities that the Bank of Canada will cut rates by its next four meetings:

Source: Bloomberg, February 27th

A quick explainer: These probabilities are derived from the market for Overnight Index Swaps. A probability over 100% indicates that the market is pricing in more than one rate cut, or a cut of more than 25 basis points. The Bank of Canada has so far resisted the global trend of central bank rate cuts, but the market is projecting that the Bank will eventually concede some ground.

It's not hard to imagine why the market has adopted this position. The Bank of Canada has repeatedly referred to a global slowdown in trade as a possible motivation for a rate cut, and the coronavirus outbreak that's currently spreading is disrupting supply chains and trade globally.

What Low Yields Mean for Investors

All fixed-income investments are priced relative to low-risk sovereign debt. As the yield on Canada 10-year bonds fall, so too do yields on other Canadian fixed-income products.  

Low long-term bond yields also put pressure on the Bank of Canada to cut its own rates. Should that happen, the prime rate would drop, and all prime-linked rates would also drop.

Investors should thus be aware that yields on all fixed income products are trending downwards, and have been for some time. There are three possible responses to this:

1. Accept the declining yields and adjust financial plans accordingly;

2. Shift from fixed-income investments to other investments;

3. Capture today's yields by investing in products with fixed rates.

It's the third strategy that we have been recommending to our clients, because many are constrained by an investment policy that only allow for fixed-income investing. By investing in products with longer terms and fixed rates, clients are able to secure the rates available today and mitigate the risk of falling rates. A laddered strategy of fixed-term GICs can create a schedule of maturities that allows for liquidity and cash flow, while securing current rates.

We have also noticed that today's yield curve features a counterintuitive kink: yields on short term bonds are higher than yields on longer term bonds. This means that investments in terms of 1 or 2 years offer better return than 10 or 30 year terms. In the past, an inverted yield curve has been a reliable indicator of trouble in the equity market, pending recession.

If you'd like to talk about your portfolio, please contact our team at 604.643.0101.

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.