Morrow notes, as nicely, that from a risk-return perspective, mounted earnings property are providing larger coupons at present then they’d in latest intervals. He believes that return vs. volatility, bonds look enticing towards shares.
Holding an chubby place in mounted earnings since 2022 hasn’t made for easy crusing by 2023. Morrow notes that we are actually practically three consecutive years of unrealized losses on the US treasury market. Volatility in bonds was unexpectedly excessive this 12 months, however shifting away from a decade of near-zero charges is prone to trigger some elevated spikiness. Morrow says that now, forward-leading indicators paint a way more enticing image for mounted earnings property. Even when rates of interest do go up, the magnitude of extra charge will increase are far much less impactful relative to previous hikes earlier within the cycle.
What’s extra probably, although, is that rate of interest mountaineering from central banks has hit a pause and begin reducing charges subsequent 12 months. Morrow believes that within the second half of 2024 we’ll begin to see cuts driving yields decrease and bond costs larger. These cuts are prone to be sooner and extra aggressive in Canada given the nation’s total rate of interest sensitivity. Any cuts may also make money considerably much less enticing, in his view, driving a rotation into bonds as nicely.
Morrow outlined the place, particularly, within the mounted earnings market he and his crew wish to for the best alternative. Funding grade bonds, he says, maintain extra promise than the excessive yield area. He thinks a short-immediate time period length holds some promise too, hewing nearer to the Canadian benchmark at round six years. He thinks international bonds may present some diversification alternatives for traders however sits at round market impartial on these property. Between Canada and the US, Morrow seems to be extra favourably at Canada within the brief time period as he expects charge cuts to come back sooner right here than South of the border.
Whereas dangers related to additional charge hikes persist, Morrow notes they’re more and more subdued. His base-case financial forecast is for slowing development and a comfortable touchdown that avoids technical recession in each Canada and the US, which ought to end in some cuts in Q3 and This fall of 2024.