Views from the Desk

Podcast: Tough Talk from the Bank of Canada

Sep. 7, 2022

As the Bank of Canada once again raises interest rates — and indicates that more hikes are likely on the way — what’s the outlook for fixed income? In today’s episode, portfolio managers Chris Heakes, Chris McHaney, and your host, Kevin Prins, break down the market’s expectations. They also discuss ETF flows, geographic allocation, and currencies.

The episode was recorded live on September 72022.

Episode Summary

Flows into ETFS for August

Fixed income Discussion

  • 2022 overnight lending rates have raised 300 bps this year at the fastest pace since the mid 90’s, rates were raised 75bps today and the market was pricing this in very strongly, market is expecting a final rate hike in October to conclude 2022 rate hikes
  • Core inflation is around 5.5% and they have a goal of reducing this number, the market is expecting that the bank of Canada will get inflation under control and that longer term rates will be lower as the economy will likely be slowing in the coming years.
  • Recent flows have been strong to ZFS - BMO Short Federal Bond Index ETF, and ZMMK - BMO Money Market Fund ETF Series as interest rates have come up these strategies are providing higher yields and low duration risks
  • ZTIP - BMO Short-Term US TIPS Index ETF looks attractive with a 0 – 5-year maturity, 2-year inflation breakeven rates are currently ~ 2.30%, if investors believe these rates will be higher than this in the future, ZTIP should perform well as CPI remains elevated

Asset Allocation discussion US vs Can Vs International equities

  • Globally coordinated rate hikes are happening, valuations are becoming attractive, Canada has a forward P/E ratio of 11, US is at ~ 17 P/E, international equities are much lower as there are issues with Ukraine and energy prices, emerging markets have been a tough place to be for the last few years and provide more upside potential

Currency Discussion

  • US $ strength is occurring globally and is expected to continue, USD vs Euro highest since 2002, The British pound is close to parody last time it was this low relatively was in the mid 1980s, 1998 low for the Yen vs USD currently
  • USD vs CAD; CAD has been strong due to strong energy prices and raising interest rates which both have been providing continued support
  • Global slowdowns do have a negative effect on the Canadian dollar, but elevated energy pries will continue to support it
  • Japan has not been increasing interest rates and are continuing with quantitative easing, USD vs YEN is at levels not seen since 1996
  • For investors that want some protection a currency hedge back to CAD for international equities is ideal, for USD and CAD investors can consider a 50- 50 approach to hedging/​un hedging as it is difficult to make a definitive call in one direction

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