Posts Tagged ‘Bond Investors’
Thursday, May 31st, 2012
Wall Street Food Chain
by William H. Gross, PIMCO
- Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors.
- Both the lower quality and lower yields of such previously sacrosanct debt represent a potential breaking point in our now 40-year-old global monetary system.
- Bond investors should favor quality and “clean dirty shirt” sovereigns (U.S., Mexico and Brazil), for example, as well as emphasize intermediate maturities that gradually shorten over the next few years. Equity investors should likewise favor stable cash flow global companies and ones exposed to high growth markets.
The whales of our current economic society swim mainly in financial market oceans. Innovators such as Jobs and Gates are as rare within the privileged 1% as giant squid are to sharks, because the 1% feed primarily off of money, not invention. They would have you believe that stocks, bonds and real estate move higher because of their wisdom, when in fact, prices float on an ocean of credit, a sea in which all fish and mammals are now increasingly at risk because of high debt and its delevering consequences. Still, as the system delevers, there are winners and losers, a Wall Street food chain in effect.
These economic and/or financial food chains depend on lots of little fishes in the sea for their longevity. Decades ago, one of my first Investment Outlooks introduced “The Plankton Theory” which hypothesized that the mighty whale depends on the lowly plankton for its survival. The same applies in my view to Wall, or even Main Street. When examining the well-known wealth distribution triangle of land/labor/capital, the Wall Street food chain segregates capital between the haves and have-nots: The Fed and its member banks are the metaphorical whales, the small investors earning .01% on their money market funds are the plankton. Yet similar comparisons can be drawn between capital and labor. We are at a point in time where profits and compensation of the fortunate 1% – both financial and non-financial – dominate wages of the 99% and the imbalances between the two are as distorted as those within the capital food chain itself. “Ninety-nine for the one” and “one for the ninety-nine” characterizes our global economy and its financial markets in 2012, with the obvious understanding that it is better to be a whale than a plankton. Not only do Wall Street and Newport Beach whales like myself have blowholes where they can express their omnipotence as they occasionally surface for public comment, but they don’t have to worry as yet about being someone else’s lunch.
Delevering Threatens Global Monetary System
Yet while the whales have no immediate worries about extinction, their environment is changing – and changing for the worse. The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures.
The balance between financial whales and plankton – powerful creditors and much smaller debtors – is significantly dependent on the successful functioning of our global monetary system. What is a global monetary system? It is basically how the world conducts and pays for commerce. Historically, several different systems have been employed but basically they have either been commodity-based systems – gold and silver primarily – or a fiat system – paper money. After rejecting the gold standard at Bretton Woods in 1945, developed nations accepted a hybrid based on dollar convertibility and the fixing of the greenback at $35.00 per ounce. When that was overwhelmed by U.S. fiscal deficits and dollar printing in the late 1960s, President Nixon ushered in a new, rather loosely defined system that was still dollar dependent for trade and monetary transactions but relied on the consolidated “good behavior” of G-7 central banks to print money parsimoniously and to target inflation close to 2%. Heartened by Paul Volcker in 1979, markets and economies gradually accepted this implicit promise and global credit markets and their economies grew like baby whales, swallowing up tons of debt-related plankton as they matured. The global monetary system seemed to be working smoothly, and instead of Shamu, it was labeled the “great moderation.” The laws of natural selection and modern day finance seemed to be functioning as anticipated, and the whales were ascendant.
Too Much Risk, Too Little Return
Functioning yes, but perhaps not so moderately or smoothly – especially since 2008. Policy responses by fiscal and monetary authorities have managed to prevent substantial haircutting of the $200 trillion or so of financial assets that comprise our global monetary system, yet in the process have increased the risk and lowered the return of sovereign securities which represent its core. Soaring debt/GDP ratios in previously sacrosanct AAA countries have made low cost funding increasingly a function of central banks as opposed to private market investors. QEs and LTROs totaling trillions have been publically spawned in recent years. In the process, however, yields and future returns have plunged, presenting not a warm Pacific Ocean of positive real interest rates, but a frigid, Arctic ice-ladened sea when compared to 2–3% inflation now commonplace in developed economies.
Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. As they question the value of much of the $200 trillion which comprises our current system, they move marginally elsewhere – to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.
Tags: Bill Gross, Bond Investors, Brazil, Central Banks, Equity Investors, Estate Move, Fishes In The Sea, Food Chains, Giant Squid, Global Monetary System, Gross Investment, Haves And Have Nots, Investment Outlook, Little Fishes, Market Investors, Member Banks, Money Market Funds, Stocks Bonds, Street Food, Wealth Distribution, William H Gross, Winners And Losers
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Sunday, April 22nd, 2012
April 20, 2012
The Schwab Center for Financial Research presents Bond Insights, a bi-weekly analysis of the top stories in today’s bond markets. In this issue we discuss the upcoming FOMC meeting and what we’re expecting, Moody’s downgrade of GE, the growing divide in the municipal bond market, and strategies to help investors build a diversified bond portfolio.
The Fed’s Next Move?
“If everything seems under control, you’re not going fast enough”—Mario Andretti. If you’re an investor, you might hope that policy makers in the developed world would heed the wisdom of Mario Andretti. After a burst of confidence in the first quarter, when things appeared to be running smoothly, the markets have re-focused on the challenge of trying to reduce government debt in the absence of economic growth. Here in the U.S., the next opportunity bond investors will get to observe shifts in policy will be the Federal Reserve’s next meeting on April 24-25th. The Fed may feel reasonably confident that they’re “in control,” but it seems less likely to us that they’ll feel we’re going “fast enough.”
- We don’t expect any change in policy at the Fed’s April 24-25th meeting. But the market will be scrutinizing the Fed’s economic projections for hints about further quantitative easing, the end of Operation Twist and the length of the Fed’s commitment to low interest rates. At the January FOMC meeting, the committee made the historic decision to publish forecasts on rates and economic measures from the 17 committee members, along with the “central tendency” (i.e. where the bulk of the projections reside.) It’s the range that we’ll be watching most closely for signs of shifting expectations.
- Projections for GDP growth are likely to indicate a moderate, but not exceptional, growth rate. The range is likely to remain in the 2.5% to 3.0% range, in our view. Based on the January projections, the range of forecasts for GDP wasn’t very wide, though there was a wider range of views on inflation and unemployment. Positive growth is encouraging, of course, but the pace of growth remains sub-par compared to a more robust recovery.
- The unemployment rate has already fallen to the low end of the Fed’s range, based on the January projections. Therefore, it seems reasonable to anticipate that range will be lowered from the 8.2% to 8.5% projections published in January. FOMC members appear to disagree on the reasons for the recent path of unemployment. Fed Chairman Ben Bernanke and the more “dovish” Fed members (meaning, they favor lower rates and more accommodative monetary policy) suggest that the drop in unemployment is largely due to discouraged workers dropping out of the labor force. In contrast, some more “hawkish” members (those who tend to lean toward a tighter monetary bias) believe that unemployment is high due to a structural mismatch of skills with job openings. It’s no surprise to report that the Bernanke “dovish” camp is still driving policy.
- On inflation, the views also diverge between the hawks and doves. The January Fed report showed a wide dispersion of projections for the deflator for personal consumption expenditures (PCE, one of the Fed’s preferred inflation measures) between 1.3% and 2.8% for 2012. The central tendency narrowed to 1.4% to 1.8%, but clearly this is where there is some disagreement on the outlook. The more dovish Bernanke camp, expecting lower inflation, will hold sway here (in our view) as well, until data showing higher prices driven by increased lending and/or wage growth clearly changes.
- We don’t expect that the Fed will hint at or announce further quantitative easing. GDP appears to be growing at 2% to 2.5% rate or higher, unemployment is falling and core inflation is holding near the 2% level. Lending growth is improving, pointing to a more stable banking sector and adequate liquidity in the financial system. Returns from each round of easing appear to be diminishing. However, we also expect that Bernanke will leave the possibility of QE3 (i.e. a third round of bond buying from the Fed designed to help keep interest rates low) on the table. He has consistently said that the Fed is prepared to do more if economic conditions warrant it.
- What would warrant more action by the Fed? We’re encouraged by stronger signs from the U.S. economy, as well as efforts to stabilize the European credit crisis. But two risks we worry about are the upcoming fiscal tightening that may happen in 2012—the so-called “fiscal cliff”—as well as a worsening of the European debt crisis.
- On fiscal stimulus. Bush-era tax cuts are set to expire, automatic spending cuts are set to trigger and stimulus programs are winding down. Cuts to stimulus alone even with an extension of tax cuts will likely be a drag on the U.S. economy in the short-term. The effect of this is estimated to be in the vicinity of 3% of GDP by many economists.
- On Europe. If European sovereign debt problems threaten to spread over to the U.S. banking sector and affect U.S. growth, the Fed may be pushed to respond with some form of monetary stimulus.
- Bottom line. While we don’t expect an official policy change at the upcoming FOMC meeting, the release of a new set of economic expectations, if they vary greatly from the last projections in January, could be a market moving event. For bond investors, there’s nothing to indicate to us that the tilt won’t remain toward accommodative rate policy until 2013 and beyond until there’s rate of change in growth speeds up.
Central Tendency of Fed Forecasts—January 2012
Source: Federal Reserve, January 25, 2012. Numbers in the table are year-over-year percentage change for real GDP, PCE inflation, and core inflation.
Moody’s Downgrade of GE
While it may not have been a major news event to most market watchers, Moody’s downgraded the debt ratings for General Electric Company (GE) to Aa3 along with the rating on its wholly-owned financial subsidiary, GE Capital Corporation (GECC), to A1. GE was once one of the seemingly ‘untouchable’ Aaa/AAA-rated industrial corporations, so the changes aren’t insignificant. In Moody’s view, GE still has “many AAA-like credit characteristics.” But their view also reflects the “heightened risk profile inherent to finance companies like GECC,” they say, a significant part of GE’s operations. The broader takeaway to us is not so much a comment on GE specifically. We are not making a company-specific comment or investment recommendation. It’s more about the inherent sensitivity of lending and financial companies to smoothly functioning financial markets as well as access to money when they need it.
- The credit crisis continues to reveal the risks in market funded financial institutions, a risk that rating agencies and markets strive to understand. Moody’s indicated that the GE downgrade was a reflection of risk stemming from its financial arm, GECC. While the downgrade isn’t good news for investors, it’s not a major surprise. On March 19, Moody’s revised its global rating methodology for financial institutions and warned that others may be downgraded as well, some, potentially, by several rating notches. Their views, they say, reflect ongoing market and structural developments as well as insights gained from the recent global credit crisis and 2007-2009 recession.
- “During the credit crisis, [credit] markets were unreliable for even the strongest issuers.” While oversight has improved, the sensitivity of banks and financial firms to market conditions is still a fundamental part of the business model of finance firms. Financial institutions, including GECC, involve risks associated with a “high reliance on confidence sensitive funding,” even though, in Moody’s view, GECC is “one of the strongest finance companies in the world.” Even with its fundamental strengths, and connection to General Electric, GECC still “relies on the capital markets” to fund its portfolios.
- For investors, be careful about credit quality and too much exposure to a single sector or security. Most banks and financial institutions have taken steps to build capital and strengthen reserves. Regulatory scrutiny, including Dodd-Frank and the Volker rule, are seeking to put rules in place to manage and limit risk. Other banks continue to deal with legacy issues from the financial crisis. Still, this is an area to be wary of lower-rated issuers and investing based on higher yields only.
- We divide corporates broadly into financial institutions, industrials and utilities. We’re not committed to the notion that investors should strictly benchmark their exposure to individual bond sectors, such as corporate bonds, to an index or snapshot of the market. But it’s helpful to understand the composition of markets as a whole as a reminder to spread out investments in a way that provides diversification and limits exposure to any single sector alone. The table below shows this market balance, over time, using the widely-followed Barclays US Corporate Bond index.
Composition of the U.S. investment-grade corporate market by sector
Source: Barclays U.S. Corporate Bond Index, daily data as of April 17, 2012.
Financials including banks currently account for roughly 35% of the U.S. investment-grade corporate market, a level that’s fallen from nearly 50% prior to the 2008 credit crisis. Industrials, including conglomerates like GE and a wide range of other non-financial issuers excluding utilities, now accounts for 54%.
- Yields should be higher, in our view, compared to similarly-rated industrials and utilities. This is market pricing in compensation for ratings volatility, the potential for future changes in regulatory policy and methodology from the rating agencies as well as fundamentally leveraged, market-reliant business models. The chart below shows these yield spread over time. Currently, it looks to us that investors are generally being compensated, relative to the risks, if they can stomach some price volatility and diversify adequately against risk in any single issuer. Whether you are receiving adequate compensation for your needs should be an individual decision, depending on your risk tolerance and the role in the rest of your portfolio.
Yield Spread of the U.S. investment-grade corporate market by sector
Source: Barclays U.S. Corporate Bond Index, daily data as of April 17, 2012. Option-adjusted spread (OAS) is the basis point spread relative to Treasuries, net of the cost of any embedded options.
The Growing Divide in Muni Bonds
The direst predictions about muni defaults haven’t materialized. The revenue picture for state and, to a lesser degree, local governments, is stabilizing in our view. Still, municipal governments are caught in the bind of rising social service needs and employment costs and the “age of austerity”—the fundamental need, as well as the political tide, of limited revenue and taxing ability. We think that we’re well into a process of divergence in credit quality in state and local government muni bonds—that is, the division between the vast, silent majority that are managing challenges and the vocal minority who are not. It’s our view that defaults in state and local government bonds will remain isolated events. But issuers have become less homogenous, less interchangeable with each other without investigation or credit analysis.
- We think the top priority for municipal governments will be managing multiple stakeholders and obligations. This is generally the case for the wide range of 50,000+ state and local municipal bodies, whether they’re active bond issuers or not. That’s the reality of a tight revenue climate and a tough balance of employment and healthcare costs, service obligations, and other obligations like employee pensions that have been promised and funded. This is a much tougher task when resources are limited. It’s not a surprise to see debate and headlines focused on these issues. This will be a challenge for the next decade or more, in our view. We’ll likely see more idiosyncratic cases of these pressures leading to distress. For the most part, we expect that that the impact to bondholders will remain isolated, but not zero.
- Stockton, California and others are case studies. What happens, exactly, when a municipality reaches the end of its rope and needs help? We’re finding out, with the widely-publicized examples of Vallejo, CA, Jefferson County, Alabama and now Stockton, CA. As we said, there will be exceptions. And other issuers will watch the cases to see if they’re “successful.” Note: Vallejo, CA is one example that has been widely cited as an example of the enormous expense, and limited benefit, of a municipal bankruptcy filing. The city was able to negotiate very few concessions with stakeholders including unions. And individual bondholders—not the primary source of most of Vallejo’s problems—were largely unaffected.
- Pay close attention to the bonds you buy, and own. There’s more and more information available every day to help with this, thanks to ongoing reforms from municipal security governing bodies such as the Municipal Securities Rulemaking Board (MSRB). The MSRB’s website, EMMA, has links to current municipal bond disclosures. But the consistency and quality of the disclosures is being watched closely by the MSRB and other rule-making authorities. Even with current disclosure, investors must also have some sense of how to use the information they receive. This is still a challenge, given the complexity and idiosyncrasies of municipal credit analysis.
- Few municipalities will broadcast in plain English pending credit stress. Unlike corporations, municipalities aren’t profit-seeking organizations. And they don’t have quarterly reporting requirements, their budget processes can be opaque and they don’t have publicly traded equity as a measure of current and future success. (The flip-side to this, we’d note, is that you’d have to work hard to find a way for a municipal government to shut-down and disappear. This is not the case with corporations where liquidations happen regularly.) As a result, you won’t hear much in plain English about credit risk unless you’re well-trained in reading between the lines and finding the fine line between ordinary business and signs of real stress.
- Outsourcing credit analysis using funds and professional managers is still a good option, for many. Professional managers, whether for funds or managed accounts, can help look for problems, but also provide the variety of individual muni issuers to diversify against idiosyncratic, issuer-specific risk. We don’t expect that we’ll see a widespread shift in defaults, as we’ve said previously. But credit analysis and active monitoring may be increasingly important in the “next phase” for the historically stable, but strained, universe of state and local government bonds.
Diversification and Bond Benchmarks
What’s a good benchmark to build a bond portfolio around, and is it adequate as a starting point in the current market for most investors? The Barclays U.S. Aggregate Bond Index is a commonly-used taxable bond index. Over time, it has become heavily skewed toward government bonds, with very low yields and limited exposure to other sectors. Does this provide enough diversification for most investors focused on a broader range of investments as well as income now?
- The Barclays U.S. Aggregate Bond Index is now dominated by Treasuries and government-backed securities. Since the financial crisis, a concern we have is that the index has a greater proportion in government bonds, including agency-backed securities, many of them mortgage bonds from Ginnie Mae as well as Fannie Mae and Freddie Mac. Both Fannie and Freddie mortgage bonds, a multi-trillion dollar part of the U.S. taxable bond market, are currently supported by the U.S. government. Only about 20% of the index represents corporate bonds. Note: This index does not include tax-exempt muni bonds. Many investors could consider using highly-rated munis, in our view, as the foundation for a core bond portfolio in taxable accounts.
- The index is now more concentrated in one issuer—the Federal government—and has been delivering a lower yield than many clients may want for an income-oriented portfolio. It will be no surprise to most fixed income investors, but the yields on government bonds remain low, with the yield for the Aggregate Bond Index 2.1% as of April 16, 2012. The average maturity of bonds in the index has also become slightly longer, currently at 7 years. This may be longer, with lower yield, than many investors will be comfortable with, even in their core holdings. Keep in mind that the Aggregate Bond index does not incur management fees, costs and expenses and cannot be invested in directly.
- One strategy is to diversify into other sectors of the bond market, subject to need and risk tolerance. We continue to favor credit (i.e. investment-grade corporate bonds) in the current climate, for up to 30% or so of a core bond portfolio, as well as certain types of municipal bonds in taxable accounts. In the current climate, a core portfolio may benefit from “tilts” in credit away from an 80% exposure to Treasuries and government-related mortgage bonds. The key point to us, as always, is diversification and not pushing the boundaries here too far. A “core and explore” strategy, starting with bonds with low credit risk, supported by exposure to intermediate-term corporate and muni bonds using ladders, still makes sense to us for most income-oriented investors in the current climate.
- We also continue to believe that investors can also “expand the core” using mutual funds or exchange-traded funds to build a diversified bond portfolio. For examples of portfolios using funds, clients can log-on to Schwab.com and go to Products, then Portfolio Solutions, and then look for the Schwab PortfoliosTM link. They’ll find an online tool they can use to view a pre-set list of mutual funds allocated according to the risk profile they select. Consider using the list as a starting point, boosting diversification using other funds—such as credit-specific exchange-traded funds (ETFs) or multi-sector and world bond funds—to expand your portfolio.
For additional help or a look at the mix of maturities and credit in your portfolio, talk with your financial consultant or a Schwab Fixed Income Specialist at 800-626-4600.
Please visit www.schwab.com/onbonds for more fixed income perspective from the Schwab Center for Financial Research. If you have questions or concerns about the issues raised in this publication, please speak to your Schwab representative.
For funds, investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.
Some specialized exchange-traded funds can be subject to additional market risks.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors.
Income from tax-free bonds may be subject to the Alternative Minimum Tax (AMT), and capital appreciation from discounted bonds may be subject to state or local taxes. Capital gains are not exempt from federal income tax.
“High yield” securities are subject to greater credit risk, default risk, and liquidity risk.
International investments are subject to additional risks such as currency fluctuation, political instability, differences in financial accounting standards, foreign taxes and regulations and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
This report is for informational purposes only and is not an offer, solicitation or recommendation that any particular investor should purchase or sell any particular security or pursue a particular investment strategy. The types of securities mentioned herein may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. We believe the information obtained from third-party sources to be reliable, but neither Schwab nor its affiliates guarantee its accuracy, timeliness, or completeness.
Past performance is no guarantee of future results.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Diversification strategies do not assure a profit and do not protect against losses in declining markets.
Barclays U.S. Aggregate Bond Index represents securities that are SEC-registered, taxable and dollar denominated. The index covers the US investment-grade fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities.
Barclays U.S. Corporate Bond Index covers the USD-denominated, investment grade, fixed-rate, taxable corporate and non-corporate bond markets. Securities are included if rated investment-grade (Baa3/BBB-/BBB-) or higher using the middle rating of Moody’s, S&P, and Fitch.
Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
Tags: April 24, Bond Investors, Bond Markets, Bond Portfolio, Central Tendency, Committee Members, Diversified Bond, Economic Growth, Economic Measures, Economic Projections, Federal Reserve, Fixed Income, Fomc Meeting, GDP Growth, Government Debt, Low Interest Rates, Mario Andretti, municipal bond market, Schwab, Strategist
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Monday, March 19th, 2012
PIMCO’s Bill Gross joined Dan Gross on Yahoo Tech Ticker to discuss a host of bond related and economic views. Much like myself, he sees another round of QE (sterlized or otherwise) – in fact he takes it another step further and says there is a good chance of QE4 as well.
Another round (or two) of quantitative easing from the Federal Reserve, muted growth and an end to the 30-year bull run in government bonds. That’s what Bill Gross, one of the largest bond investors in the world, sees for the U.S. economy in the coming year.
Despite the Fed’s communiqué earlier this week, Gross doesn’t believe the central bank’s interventions in the bond markets are over. In two rounds of quantitative easing (QE), the Federal Reserve printed money to buy hundreds of billions of dollars of Treasury bonds and mortgage-backed securities. “I believe there will be a QE3, and perhaps a QE4,” he said. Why? In the past few years, whenever central banks have stopped or paused their quantitative easing efforts, “stock prices have fallen and economies have slowed.” The globe’s private economies simply aren’t sufficiently strong enough to support robust growth, and the world’s central banks aren’t willing to stand by and watch. “That’s not a policy recommendation, it’s simply a realization that the substitution of central bank monetary purchases will continue for a long time, as long as they [central banks] try to support private economies on a global basis,” Gross said.
Still, Gross believes the 30-year long bull run for bonds may be coming to an end. “We’re certainly close and have been close for a number of months,” he said. It’s very difficult to imagine interest rates going lower. “The bond market, whether it’s Treasuries, mortgages, or investment-grade bonds in combination, basically yield a little higher than 2%,” Gross said. “And unless the U.S. economy replicates Japan, where yields are down to 1% on average, then you’d have to say that we’re close to the bottom in terms of yield.” He adds: “It doesn’t mean the beginning of a bear market, but it does suggest at least that the great bond bull market since 1981 is probably over.”
Recent market activity in some bonds certainly ratifies that view. In recent weeks, the yield on the 10-year Treasury has risen from about 1.8% in late January to about 2.28% on Thursday. But “those yields aren’t attractive,” Gross says. Gross recommends that investors avoid longer-term bonds — i.e. 10-year and 30-year bonds — whose prices may fall if long-term growth and inflation expectations rise. However, they should also avoid short-term bonds. “The Fed has conditionally guaranteed that they won’t be raising interest rates until late 2014, and that’s almost three years from now.” Gross believes that bonds that mature in five, six, or seven years occupy the sweet spot in today’s market.
Bond holders tend to fear strong growth because it has the potential to ignite inflation and boost interest rates, thus reducing their returns. Gross says that while the economy has improved, it shows no signs of overheating. He believes the U.S. economy is growing at about a 2% annual rate in the first quarter “and probably beyond.” That’s about as good as can be hoped for. While the Federal Reserve has injected close to $1 trillion into the U.S. economy in the past year, growth is in large measure tied to what happens in the global economy. And the omens from abroad aren’t particularly good. “China is slowing and the euro land is in recession,” Gross said. The U.S. is growing at a decent clip, “what we call a new normal, but it probably won’t get back to the 3 or 4% real growth numbers that we witnessed over the past decades.”
Tags: Bill Gross, Bond Investors, Bond Market, Bond Markets, Central Banks, Consumer Price Index, Economic Views, Federal Reserve, Good Chance, Oil Prices, Opines, PIMCO, Principal Reasons, Qe, Qe3, Stock Prices, Term Bonds, Term Debt, Term Interest, Treasury Bonds
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Sunday, February 5th, 2012
This Week: CLAYMORE S&P/TSX CDN DVD ETF Ticker: CDZ / TSX
Miserly bond yields won’t pay for a nice dinner these days. For that, you need the generosity of dividend-paying equities. Add the promise of capital gains and you may even opt for the nicer bottle of wine.
Bond investors are suffering from the lowest yields in a generation. Quality, five-year corporate bonds are yielding about 2.4%. That’s about half the average for the past decade. Compare that to equity dividend yields, which, at about 2.7% for the S&P TSX 60 Index, are the best in a decade, barring a period of extreme valuations in late 2008. In other words, equity dividends are higher by a third of a percentage points than quality bond yields, and that’s before the dividend tax credit and before any capital gains. (See Chart of Yields below)
What brought us to this upside-down wonderland? Last year’s poor showing by Canadian equities, combined with the Euro-zone crisis saw panicked investors flock to the safety of quality bonds. They were the best performing assets last year. Quality corporate bonds with maturities of about five to seven years returned about 9% in 2011.
Bonds prices are now hitting their ceiling and cannot go much higher. However, nor will they fall soon with the U.S. Federal Reserve committed to near-zero rates into 2014 and our own Bank of Canada likely to follow suit. More reason then for investors to look elsewhere for income.
The other factor pushing up dividend yields are record corporate profits that are as high now as they were just prior to the 2008 recession. Companies have been spending those profits buying back their shares and on dividends – both good for equity investors.
Eventually, the upside-down will right itself, as investors shun bonds in favor of dividend-paying stocks. That will push bond yields up and dividend yields down. To benefit from this, we have been re-allocating our Canadian equity exposure to ETFs of higher dividend-yielding quality companies.
Two we considered were iShares DJ Canada Select Dividend ETF (XDV/TSX) and the Claymore S&P/TSX Dividend ETF (CDZ/TSX). Both have consistently outperformed for years.
XDV, with a current yield of about 3.9%, holds the 30 biggest companies by market cap that also pay a dividend. As a result, 55% of the ETF is in banks and insurers.
The yield on CDZ is lower at 3.2% and its price-to-earnings ratio is higher at about 15.3 times but it is much more diversified. It holds 60 companies, all of whom have consistently raised dividends over the last five years and have at least $300 mln in market cap, though the average is $8 billion.
Energy and industrial firms are the biggest sectors with nearly half the ETF weight, followed by financials (though not the big banks or insurers) and then consumer discretionary firms like Tim Hortons, Shaw and Cogeco.
Of the two, we opted for CDZ mainly because of its diversification. XDV’s overweight in financials, especially in a period of increasingly heavier regulation of banks and insurers, makes us nervous.
Its diversification has also helped CDZ far outperform XDV as well as XIU/TSX, the biggest S&P/TSX 60 ETF. Over the last five years, CDZ has returned 23%, compared to XDV’s 9.4% and XIU’s 8.0%. XDV’s financial overweight helps link its return closely to the S&P/TSX 60, which has a 32% financials weighting.
One thing to note: iShares bought Claymore a few weeks ago. It has not said it will change Claymore products and given the success and distinctive approaches of CDZ and XDV, I doubt these two ETFs will be affected and even if they are, it likely won’t harm unitholders.
The Claymore takeover may also be to the benefit of Canada’s other ETF managers, including BMO, Horizons, RBC and Vanguard as they carve out their own space from a growing ETF market place.
The biggest winners will be investors, more of whom are investing through ETFs, either directly or through investment managers. In fact, Morningstar said recently that U.S. firms managing ETF portfolios saw assets grow my 43% last year as investors opted for top-down, asset-allocation strategies that minimized stock-specific risk.
Dividend Yields rarely exceed Bond Yields
Charts courtesy of Bloomberg L.P. Click on Chart for Larger Image
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Tags: Bank Of Canada, Bond Investors, Bond Yields, Bottle Of Wine, Canadian Equities, Canadian Equity, Corporate Bonds, Corporate Profits, Dividend Paying Stocks, Dividend Tax Credit, Dividend Yields, Equity Exposure, Equity Investors, Euro Zone, Generation Quality, Investors Flock, Nice Dinner, Quality Bond, TSX 60, Zero Rates
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Thursday, January 19th, 2012
When reporting on the unfolding of the credit crisis I often referred to the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds.
The difference between the yields is indicative of investor confidence. A rising ratio indicates bond investors are growing more confident, in other words preferring more speculative bonds over high-grade bonds. On the other hand, a declining ratio indicates investors are demanding a lower premium in yield for increased risk. That shows a waning confidence in the economy.
Since hitting an all-time low in December 2008, the Index was almost back to pre-crisis levels in January this year as investors grew increasingly confident. But that was when investors started focusing on sovereigns that were starting to get into trouble.
Since the start of 2011 the Index has given up more than 40% of its gains. This puts us back at levels experienced during mid-2008 – just prior to confidence falling off a cliff. Based purely on this chart, one has to conclude that confidence remains fragile.
Thursday, December 22nd, 2011
A Bad Year for Common Sense
by Gerald Hwang, CFA, Portfolio Manager, Matthews International Capital Management, LLC
The phrase “common sense” can be a paradoxical concept in investment conversations. Seemingly imbued with a perverse, reverse meritocracy, the catchphrase appeals to investors as an intellectual leveler. It suggests, “Let us think things through logically.” Not only does this sound good, but what could be more egalitarian and humble? But when investment managers consider something to be “common sense,” be wary.
Let’s take a look at how common sense failed bond investors this year.
Risky or Risk-free: Which Is It?
From the start of the year until the end of November, long-dated U.S. Treasuries generated 26% in returns. Few market participants were predicting such a rally. Sober analysts with common sense made note of the low yields early in the year and an economy that was two years past the peak of the financial crisis. The probability of further rate declines appeared low with the Federal Reserve at ZIRP (zero interest rate policy). Some bond investors even shorted Treasuries outright, assuming that some combination of factors (such as better economic growth prospects or a pickup in inflation) might drive rates higher.
Regarding any potential flight to Treasuries caused by stress in Europe, common sense dictated that this was already priced into the market: yields were already extremely low. But they headed lower. This is bad news indeed for those holding Treasury shorts and who are benchmarked versus indices with a heavy government component.
Euro Stability Amid Political Chaos
The euro is up about 0.5% versus the U.S. dollar from the start of the year through November 30. The European Monetary Union itself is a magnified example of the “tragedy of the commons.” Just as individual sheepherders acting rationally will plunder a commonly held pasture, so too have individual countries acting rationally plundered the common currency. The relatively tight trading range of euro versus U.S. dollar, and the relatively flat year-over-year performance of the euro has confounded many investor expectations. This has been particularly baffling given the severity of the underlying crisis and the market’s consensus view of its intractability.
Japanese Government Bond Outperformance
Investors have a number of good reasons to dislike Japanese Government Bonds (JGBs). U.S. holders of JGBs enjoyed a 6% year-to-date total return—which is surprising given the low yields across the entire Japanese curve. At the start of the year, the 10-year JGB yielded 1% (and you thought the U.S. 10-year bond was low at 2%!). Two surprises are attached to JGB outperformance. First, Japanese yields declined slightly from those already-low levels, creating a capital gain. Second, a 4.5% appreciation in the yen versus the U.S. dollar augmented JGB returns to U.S. dollar-based investors. (And the yen appreciated 3.9% versus the euro.)
It is unlikely that many bond investors outside Japan overweighted JGBs in anticipation that the minimal carry would be so strongly augmented by positive yen returns. Japan has the developed world’s highest debt/GDP ratio. Recovery efforts from the earthquake and nuclear disaster would suggest that this ratio would rise. Japanese demographics suggest that the growing ranks of the elderly will cease being net providers of capital to the Japanese government. At least this year, none of these factors mattered.
Given the extraordinary macroeconomic conditions in which we find ourselves, perhaps some of these performances are not out of keeping with the environment. High levels of unemployment in the West have been paired with tight fiscal policy and less-than-accommodative monetary policy, which itself seems absurd. In Asia, India and China have been stepping on the brakes for most of the year.
Perhaps next year, counter-intuitive investment theses will continue to prevail over false “common sense.”
Gerald Hwang, CFA
Matthews International Capital Management, LLC
The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Matthews does not accept any liability for losses either direct or consequential caused by the use of this information. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.
Tags: Bond Investors, Capital Management, Cfa, European Monetary Union, Growth Prospects, Hwang, Interest Rate Policy, Investment Managers, Leveler, Management Llc, Market Participants, Market Yields, Matthews International, Political Chaos, Portfolio Manager, Rate Declines, Sheepherders, Tragedy Of The Commons, Treasuries, Zero Interest
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Thursday, November 24th, 2011
by Russ Koesterich, Chief Investment Strategist, iShares
These investors are essentially expressing their frustration with European politicians and policy makers. Like their US counterparts, European politicians and policy makers are failing to adequately address their region’s debt problems. Here are three reasons why.
1.) Reforms alone aren’t enough: In the past month, governments in Greece, Italy and Spain have fallen and been replaced by new governments with stronger mandates to pursue necessary fiscal and structural reforms. While this certainly represents some progress, bond investors recognize that reforms don’t happen overnight and aren’t enough to deter a worsening crisis.
2.) A lack of firepower: The European Financial Stability Fund (EFSF) was supposed to be able to halt slides in European sovereign debt markets by buying up bonds while reforms are being implemented. Although European politicians were successfully able to expand the EFSF to support such purchases, the current amount of the fund is not enough to solve Europe’s problems.
3.) The savior hasn’t stepped up: It’s now apparent that the only entity with sufficient purchasing power to halt slides in European bonds is the European Central Bank (ECB). Unfortunately, both the ECB and the German government have argued against expanding the ECB’s existing bond purchase program beyond its current limited parameters. The ECB has said governments are the ones who should solve the region’s problems. The president of Germany’s Bundesbank, meanwhile, recently said such stepping up by the ECB would be a violation of European law. Experts, however, have called that argument into question.
What does this mean for investors? If a politically acceptable solution is not found, Europe risks turning a liquidity problem for smaller peripheral countries into a solvency problem that infects most of the continent. As the European failure to act continues, volatility is likely to remain high in the near term.
Copyright © iShares
Tags: Acceptable Solution, Bond Investors, Bundesbank, Chief Investment Strategist, Debt Markets, Debt Problems, Efsf, Europe Risks, European Markets, European Politicians, Financial Stability, Firepower, Fiscal Reforms, German Government, Greece Italy, Ishares, Law Experts, President Of Germany, Sovereign Debt, Stability Fund
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Thursday, October 13th, 2011
October 12, 2011
By Scott Ronald, Steadyhand Funds
In preparing our Quarterly Report, I compiled some numbers that speak for themselves:
- Global stock markets had their worst quarter since Q4 2008
- Greece was down 42%. Italy, France and Germany were all down 25%. Canada was down 12%. Japan was down 11% (all in local currency terms)
- Almost every major European market has a P/E below 10 and dividend yields are commonly north of 4%
- The loonie hit $1.06 US in July and ended the quarter at $0.95
- Oil fell 17%
- Base metals fell by more than 20%
- The Government of Canada 10-year bond yield dropped from 3.1% to 2.1%
- The US Treasury 10-year bond yield dropped from 3.2% to 1.9%
- The DEX Universe Bond Index was up 5.1% – its highest quarterly return since 1996
- North American sovereign bond yields are at levels not seen since the 1940s
For stock investors, it was an ugly quarter. Bond investors, on the other hand, had a heyday. Looking ahead, it seems pretty evident where the opportunities lie. Hint: it’s not government bonds.
Tags: 1940s, Base Metals, Bond Index, Bond Investors, Bond Yield, Bond Yields, Bonds, Canadian Market, Currency Terms, Dex, Dividend Yields, Global Stock Markets, Government Bonds, Government Of Canada, Heyday, Italy France, Loonie, Q4, Quarterly Report, Quarterly Return, Steadyhand, Stock Investors, Us Treasury
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Monday, September 12th, 2011
Fed Policy – No Theory, No Evidence, No Transmission Mechanism
by John P. Hussman, Ph.D., Hussman Funds
On Friday, the yield on 1-year Greek debt surged above 90%, while Wall Street still has barely blinked, evidently convinced by the bailout mentality of the past three years that governments will simply make the problem go away with public funds. One thing is certain – public funds will indeed be used to address this problem. But it is also nearly certain that those funds will be used to recapitalize European financial institutions (ideally, restructured ones) following a major default of Greek debt. The reason for this is simple. With Greek debt now beyond 144% of GDP and on track toward 180% by year-end, neither a further extension of credit to Greece, nor a modest writedown of its debt, would be sufficient to restore Greece’s ability to service that debt over time.
It was only in June (see Greek Yields: “Certain Default, But Not Yet” ) that we published a schedule showing the probability of default implied by Greek yields, with several lines showing the probability of default depending on the expected date of default and the assumed “recovery rate” (the percentage of face value that bond investors could expect to recover in the event of default). That wistfully optimistic chart is reprinted below.
Amésos: Adv (Greek): Immediately, forthwith, straightaway.
As I noted in June, “At the point that a near-term default becomes likely, we would expect to see one-year yields spiking toward 40% and 3-month yields pushing past 100% at an annual rate (essentially pricing near-term bills toward the anticipated recovery rate). This temporarily reassuring situation, unfortunately, strongly contrasts with the longer-term outlook for Greek debt. Even assuming a 60% recovery rate (that is, assuming a default would wipe out 40% of the Greek debt burden), the implied probability of a Greek default within the next two years is effectively 100%. The only way you get a lower probability is to assume a far lower recovery rate.”
Tags: Bailout, Bond Investors, Bonds, Commodities, Debt Burden, Face Value, Fed Policy, Financial Institutions, GDP, Governments, Greece, Hussman Funds, Implied Probability, Mentality, Outlook, Term Bills, Term Outlook, Transmission Mechanism, Wall Street, Year End
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Friday, August 26th, 2011
Capital International Perspectives
Understanding Recent Market Developments
Fixed-income portfolio manager Wesley Phoa shares his insights on the implications of recent market developments, including the downgrade of U.S. debt and the ongoing European sovereign debt crisis. Wesley is based in Capital’s Los Angeles office and manages portfolios for U.S. investors. He is also an investment analyst covering U.S. government bonds and has responsibilities for fixedincome quantitative research. He received a PhD in pure mathematics from Trinity College at the University of Cambridge.
What does Standard & Poor’s downgrade of U.S. debt really mean for bond investors?
The impact of the rating action has been muted. Demand for Treasuries is still very strong. Investors did not stop buying Treasuries, and bank and insurance company regulators have said that the downgrade is not going to affect their treatment of U.S. Treasury bonds or other government-related securities. In essence, this downgrade will mainly affect sentiment. It should be a wake-up call for politicians and motivate them to make some constructive reforms — if so, it could actually have a positive impact in the long term.
The debt dynamics of the U.S. have been deteriorating for over a decade due to a range of government policies. However, things got dramatically worse during the last recession in 2008–09 because federal tax revenues fell sharply and there was a significant fiscal response in the form of increased government spending and tax credits. So there is a genuine long-term debt problem in the U.S. But the key point is that the economy is not broken. It is not too late to fix those problems as long as we implement sound policies.
What does this downgrade mean for Treasuries in the long run?
Even after the downgrade to AA+, U.S. Treasuries remain a large, distinct asset class that is among the most highly rated and most liquid in the world. Moreover, the investor base for Treasuries remains well diversified. Treasuries are owned by central banks, private investors, mutual funds, insurance companies and other banks throughout the world. These investors want an asset that is relatively safe from default and is universally recognized as a sound and highly liquid investment.
In addition, the U.S. dollar is the global reserve currency and it does not seem likely to be displaced from that role any time soon. If you want to keep your money in the world’s reserve currency, you would likely want to keep it in the safest asset of that currency.
Foreign central banks are the largest holders of Treasuries. They have been net buyers as they try to contain the appreciation of their own currencies by selling local financial instruments and buying U.S. dollar–denominated assets with the proceeds. While they may diversify their holdings in the long term, they are likely to continue buying Treasuries in the near term. In the last week of July, when the potential for a U.S. debt downgrade was known in the markets, the Treasury auctioned two-, five- and sevenyear notes totaling $99 billion. Foreign central banks bought 35% of these bonds compared to 30% in June.
Does the U.S. credit rating downgrade in fact diminish the reserve currency status of the dollar?
A one-notch credit rating downgrade from AAA to AA+ does not change the status of U.S. Treasuries as safe, liquid assets in the reserve currency of choice. This could be the case even if the other two main rating agencies, Fitch and Moody’s, follow S&P’s lead and cut their ratings for the U.S.
While I don’t think it is a good thing to have a global system that relies solely on U.S. dollars and U.S. Treasuries — it has not imposed a good discipline on the United States — I don’t see any sudden shift away from the current status of U.S. Treasuries or the dollar.
Is this 2008–09 all over again? What’s changed and what hasn’t?
We are in the middle of a very big debt hangover that is going to take several years to recover from. Some companies are going to prosper a lot in this environment, but I don’t think that developed markets will see a rising tide as in some previous economic expansions. In my view, the big developed markets will continue to struggle even as the developing economies continue to expand at a fast pace. It will be even more important than it has been in some of the past expansions to invest in companies that have the greatest potential to prosper, and to pick enough of them so that investors have a diversified portfolio that will hold up under different scenarios.
We are also seeing a lot of unexpected connections between different markets. These linkages are becoming more important and more complicated. Investors need to take a holistic view of markets. At Capital we have spent a lot of time in the past couple of years building better connections, finding more ways for our equity, fixed-income, money market, and macro analysts to work together. I think that as the market keeps evolving we will keep developing even more ways for our investment professionals to collaborate.
In what ways will the move affect sentiment in a market already unnerved by the debt crisis gripping Europe?
There is little doubt in my mind that recent events will bring about more market volatility. There is a very intense focus on political risk and policy risk, which are inherently difficult to predict. We are also seeing pressure on the banking system in Europe, which in itself creates financial market volatility because those institutions play such a big role in the markets. This has been a pretty fragile economic recovery and expansion, primarily because recoveries from financial crises tend to be more tenuous.
Furthermore, a big problem with a fragile recovery is that it is quite vulnerable to bad luck and policy mistakes — and we’ve had to deal with a lot of both this year, ranging from the oil supply shock in Libya, supply chain disruptions after the earthquake and tsunami in Japan, and the lack of strong, effective political leadership in both the U.S. and Europe. In Europe, there has clearly been a lot of uncertainty over how the sovereign debt crisis has been playing out, and it is very important for investors not to fixate on a single scenario.
There are several different potential outcomes to the European sovereign debt crisis. As portfolio managers, we need to be prepared for various scenarios, or at least have clear ideas on how to respond as things unfold.
Is there anything more U.S. policymakers, and the Fed in particular, can do to underpin the economy?
As we’ve seen, there is a big difference between what policymakers can do and what they will do. They can, in theory, still do a lot. The Fed has in recent days made a conditional commitment to keeping interest rates extremely low for an extended period, to 2013. To give a specific time frame and say that rates will be exceptionally low until the middle of 2013 — that is a big step for the Fed. It is new and it was probably a tough action for the central bank to take. However, this is not an unconditional commitment. It is not a promise to keep rates low under any circumstances. It is based on how the Fed expects the economy to evolve.
Among other steps, the central bank could also make a commitment to keeping the balance sheet large for a long time. It could even expand it some more by resuming large-scale asset purchases, as it did last year. Or it could extend the maturity of its Treasury holdings. The underlying message from the Fed is that it is paying attention to the U.S. economy and that it takes its dual mandate — that of delivering both price stability and full employment — very seriously. The Fed understands that the labour market is very weak and that monetary policy needs to continue to be supportive.
Still, it is not the Fed or fiscal policy that is going to get the U.S. out of an economic slowdown. It is households and businesses going out and spending and investing. As investors, we spend more time focusing on these trends and less on what the Fed is doing.
What should policymakers in the euro zone do?
First, and probably most urgently, policymakers need to stabilize the European banking system and improve the banks’ funding situation. They need to find ways to give more explicit protection to the banking system and to depositors, which is one of the things they have struggled to do so far. There are other actions policymakers can take, but those will probably occur over a longer time frame.
Investors also want a clearer picture from policymakers of who will bear the cost of bank refinancing and whether equity stakeholders will have to suffer dilution of their existing shares through capital raisings or if subordinated bondholders will have to take losses on their investments. A key step in Europe will be resolving those uncertainties. Everything does not need to be done at once, but there does need to be a plan for the next few years, not just a series of interim support measures that tide things over for a couple months.
A very important part of making sure this process works is building political support from voters in different countries. The problem is that the market wants these things to happen far more quickly than the political environment can allow them to happen in Europe.
How are investment professionals getting a clearer sense of the risks and opportunities in Europe?
We are thinking through a number of different scenarios. Some of them look at the potential impact of controlled government debt restructurings in the peripheral euro zone economies. Others factor in more aggressive intervention by the European Central Bank, which would probably imply a big devaluation of the euro. There is also the possibility of more coordinated action from the G20 group of nations, which could help stabilize markets. The worst-case scenario, which in my opinion has a very low probability of occurring, could see the breakup of the euro zone, which in the near term would impose very significant economic costs on the most debt-burdened nations.
We’re thinking all of these things through. The important thing to remember is that there are enough potential benign outcomes. If policymakers become very focused in Europe — and the market is forcing them to do just that — then I think we could see a positive resolution, although it is going to be a very bumpy ride because this will take some time.
Aside from the prospect of better policymaking, what else do investors have to be encouraged about?
Unlike in 2008, many companies have exceptionally strong balance sheets and very little organizational fat. They are operating very efficiently and have highly focused managements who understand how important it is to make sure that their companies are positioned not just to grow earnings but also to survive through different potential economic scenarios. So there really is no reason why even another round of bad luck should push us into a recession. But the most important investment theme continues to be the strong, secular growth of the developing economies — not just China, but a range of countries such as India, Brazil and Indonesia that are in a multi-decade process of growing and improving their living standards.
Although we will probably see exaggerated business cycles in these areas, we should not get distracted by those cyclical fluctuations. The broader secular picture in the developing world is highly positive, which is one of the things that will help the developed world recover and get the U.S., Europe, and even Japan through the problems of today.
How do you and other fixed-income portfolio managers think about mitigating risk in this volatile market environment?
We try to have a good combination of assets — government bonds, corporate bonds, a mix of currencies, a mix of different credits — so our portfolios are robust in the face of volatility. In the most recent period, we have seen a decline in the price of some corporate bonds issued by financial institutions while at the same time U.S. and German government bonds have rallied. As markets recover, we may see a recovery in financial credits. Hence, maintaining well-diversified portfolios is the best approach in my view.
For more information, visit: http://capitalinternational.ca
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Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Wesley Phoa does not directly manage Capital International portfolios.
The information contained in this document is for your informational purposes only and is not intended to provide any tax, legal or financial advice. The Capital International portfolios are available through registered dealers. For more information, please consult your financial and tax advisors for your individual situation. The statements expressed herein are informed opinions, speak only to the stated period, and are subject to change at any time based on market or other conditions. Additionally, in the multiple portfolio counselor system, differences of opinion are common, and the opinions expressed by an individual do not necessarily reflect the consensus of the team. Forward-looking statements are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied in any forward-looking statements made herein.
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