BONDS – FOURTH QUARTER 2014 FIXED INCOME COMMENTARY

Bonds – twice during the quarter, there was a “wobble” in the junk bond market.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” ~ Paul Samuelson

The events of the fourth quarter brought to mind the purported ancient Chinese curse, “may you live in interesting times”: Not so much as to what actually happened, but more as to what they seem to presage.

The Federal Reserve’s (Fed) asset purchase program (quantitative easing) came to an end in October as planned. Announcements from the Fed’s Open Market Committee (FOMC), following their meetings during the latter part of the quarter, continued to reinforce the notion that interest rates will remain at a low rate for an “extended period”. Nevertheless, it was clear that this may well be influenced by future economic developments.

By quarter end, Russia appeared to be near a financial collapse. While the impact of this situation appears to be limited to their domestic sphere at present, low oil prices, western sanctions, and outflows of capital are all increasing the pressure on the government.

Greece will be going to the polls in a snap election called for January 25th   in order to establish whether a consensus exists to continue with austerity measures.  Post election, it is certain that there will be increased pressure by Greece to reopen the issue of debt relief. As much as Germany may not feel inclined to entertain this notion, a potential Greek exit from the Euro zone will likely focus politicians’ minds towards reaching “creative” solutions.

In previous comments we sounded a note of caution regarding the mispricing of risk. In order to garner higher yields, when compared to the paltry returns available in government securities, bond investors have increased their exposure to high yield (formerly “junk”) bonds. In general, as demand increases for such instruments, yields decline and investors in turn look to higher risk instruments offering yields previously offered by less risky investments. This cycle continues until … it stops. Sometimes catastrophically!

Twice during the quarter, there was a “wobble” in the junk bond market. In October a short period occurred where clients began to withdraw assets from high yield funds. In line with this reduced appetite for risk, prices declined temporarily. The second event occurred as oil prices plummeted. In turn, the risk profile of oil companies increased. Once again, investors moved to lower risk and reduced their exposure to oil related, high yield instruments. These events tend to suggest that investors are becoming more jittery about riskier assets, especially in the context of increased geopolitical uncertainty.

The total return performance of the bond market as measured by the FTSE TMX Canada Universe Bond Index (formerly DEX Universe Bond Index) for the fourth quarter was an increase of 2.7%. The benchmark ten-year Government of Canada bond yield declined by 0.4% to end the quarter at 1.8%. Over the course of the quarter the Canadian dollar declined by 3.1 cents from 89.3 cents US to 86.2 cents US.

You can view, read and download our complete forth quarter commentary here:

What is Successful Investing? Learn more here>>

Download Our Free Special Report – How to Hunt For Value Stocks. Michael Sprung will share with you 5 stocks set for long-term gains here>>

We believe that investment management is about managing risk, not chasing speculative returns.  

Like to learn more? Please contact us here>>

The opinions expressed here are ours alone. They are provided for information purposes only and are not tailored to the needs of any particular individual or company, are not an endorsement, recommendation, or sponsorship of any entity or security, and do not constitute investment advice. We strongly recommend that you seek advice from a qualified investment advisor before making any investment decision.

 

Comments are closed.