I'm not sure that Canadian investors, particularly retirees or those close to retirement, are prepared for the very real possibility that government of Canada bond yields could go deeply below one per cent, or even negative. I've only started thinking about the implications myself.
Consider what Bob Michele, global head of fixed income for J.P. Morgan, wrote in his July 26 column, for the Financial Times (FT subscription required): "Ten-year U.S. Treasury yields could be headed to zero. This is not a forecast. This is not a bold prediction. This is not something that we hope happens. This is an observation of what is unfolding in the markets right in front of us."
Mr. Michele notes that about one-third of the global government bond market and one-quarter of the global aggregate bond market have negative yields. He forecasts that 10-year U.S. Treasury yields are headed for negative territory – unless the U.S. Federal Reserve intervenes.
Since the financial crisis ended, the average difference in yield between the Canadian and U.S. 10-year bond has been 29 basis points, so we can expect that a zero-per-cent Treasury yield would see domestic bonds yielding between minus 0.3 per cent and positive 0.3 per cent.
Mr. Michele sees global asset flows, not economic conditions, as the main reason for declining yields. There are currently about US$14-trillion in negatively yielding global bonds – most in Germany and Japan but increasingly European investment-grade bond yields are also going below zero – and this is forcing global portfolio managers to hunt for higher coupon payments wherever they can find them.
The logical choice is U.S. bonds, arguably the most liquid asset class in the world. Canadian government bonds, while yielding less than their U.S. counterparts, are also attractive to European and Japanese fund managers. In both cases, foreign buying will push yields steadily lower.
Negative yields on the 10-year government of Canada bonds are NOT, I should be clear, anyone’s base case forecast for 2020. It remains a low probability scenario but becomes more possible as the value of global fixed income with negative yields continues to rise.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Kinaxis Inc. (KXS-T). Ottawa-based Kinaxis is a cloud-based supply chain management software provider that is widely recommended by analysts with 11 buy recommendations and appears on the positive breakouts list. However, the share price has yet to recover from its plunge during the fourth-quarter of 2018, writes Jennifer Dowty (for subscribers). Ms. Dowty says that, if the company can show strong growth in its SaaS (software as a service) revenue and continue to announce contract wins, it could restore investor confidence and lift the share price back to where it traded before the fourth-quarter market meltdown. Until then, she suggests the stock may remain in a “wait-and-see” mode by investors, trading in a range principally between $75 and $85.
Turquoise Hill Resources Ltd. (TRQ-T). Soaring construction costs at one of the world’s most promising copper projects have hit the mining industry, giving skittish investors reason to question how much the sector has truly changed, explains Tim Kiladze (for subscribers). Turquoise Hill, which owns two-thirds of the Oyu Tolgoi project in Mongolia, surprised investors recently when it announced that an underground expansion of its mine will take much longer and cost a lot more than originally planned. Already expected to cost US$5.3-billion, the expansion will now require up to an additional US$1.9-billion in capital spending to complete. Sustainable production from the project has also been delayed by 16 to 30 months from original estimates, to between May, 2022, and June, 2023. Political risk and heavy capital requirements have weighed on Turquoise Hill’s shares for years, writes Mr. Kiladze. Since the soaring costs and major delay were announced on July 15, the stock has dropped another 46 per cent. Turquoise Hill now has a market value of about $1.5-billion, down from $13.3-billion at the height of the commodity supercycle in 2011.
NFI Group Inc. (NFI-T). NFI Group Inc., formerly known as New Flyer, should be in the sweet spot of Canadian industry right now, explains Gordon Pape (for subscribers). Its energy-efficient buses are in demand across North America as more municipalities opt for low emission or emission-free technology to meet mass transit demands. But, as Mr. Pape writes, somehow, things aren’t going right for this Winnipeg-based company. The stock has been in free-fall for much of the past year, dropping from $52 last September to $30.94 on Friday, a loss of 40 per cent. The dividend remains unchanged at 42.5 cents per quarter ($1.70 per year), providing an attractive yield of 5.5 per cent. But the sharp decline in the share price has many investors worried. Mr. Pape outlines the company’s current challenges.
The Rundown
A looming Fed interest-rate cut puts the spotlight on Bank of Canada's trade worries
The U.S. Federal Reserve is poised to deliver an interest rate cut this week to safeguard a strong U.S. economy against rising trade-war risks – a move that will heighten questions about whether Canada’s central bank will follow suit to address its own trade worries, writes David Parkinson (for subscribers). The cut will be a reversal for the Fed, he explains, which raised rates four times last year in response to strong economic growth and record-low unemployment, and until a few months ago had been expected to continue hiking. Mr. Parkinson says the Fed’s turn has less to do with the current state of the U.S. economy than it does with the growing unease surrounding the escalating trade war between the United States and China, the world’s two biggest economies. And while the Bank of Canada has given no indication that it is nearing a rate cut, its concern about the trade climate has increased.
Six reasons why a savings account is an awesome place for your money right now
If you look at both risk and reward, high-rate savings accounts might be a better place for your money than any alternative, writes the Globe’s personal finance columnist, Rob Carrick. He says stocks are having a great year, but the correction late last year proves how quickly things can reverse. “Bonds are performing nicely, but they keep doing the opposite of what people expect. Guaranteed investment certificates don’t pay enough to compensate for locking your money in and, at the end of the risk spectrum, bitcoin’s a black box that no one really understands,” he says. Mr. Carrick suggests savings accounts but recommends people seek out high-rate accounts from alternative banks “and ignore the weak offerings from the big banks and some credit unions.” He provides six reasons why high-rate savings are attractive right now.
Others (for subscribers)
CIBC warns Canadian investors: 'Extreme week ahead'
Monday's Insider Report: Canadian billionaire businessman invests over $1-million in this stock
Market movers: Stocks seeing action on Monday — and why
Monday's small-cap stocks to watch
Monday's analyst upgrades/downgrades
The Globe’s stars and dogs for last week
Others (for everyone)
Canadian dollar rebounds from 1-month low ahead of Fed rate decision
Investment Ideas: Bullish on Gibson Energy
Globe Advisor
Ten ways the wealth-management industry won't change in the next decade
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Question: I have a question regarding the withdrawal and transfer of dividends from a TFSA into a bank account we use for living expenses. My understanding is the TFSA income that is withdrawn can be replaced into the plan the following calendar year. If so, are there CRA reporting obligations or forms to fill out and submit, documenting the dividends withdrawn and then replenished?
Answer: First, a clarification. Money taken out of a TFSA can be replaced any time, starting in the calendar year following the withdrawal. There is no time limitation. There are no special forms to be filled out. Your financial institution will keep track of the information and file a report with the Canada Revenue Agency. If you have set up My Account with the CRA, you can review your contribution status at any time.
– Gordon Pape
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What’s up in the days ahead
Scott Barlow takes a look at one specific index would have allowed investors to near-perfectly time equity markets over the past 14 months and it points to one indicator – U.S. corporate bond spreads – as the most important to follow in the weeks ahead.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Brenda Bouw
Scott Barlow