Fixed Income Investing - Peak Rates and GICS: History suggests bond investors may have reason to be optimistic going forward
By: Jean Sebastien Nadeau, Daniel Chivu • February 22, 2024
The past two years presented a unique situation for income investors as the appeal of Guaranteed Investment Certificates (GICs) gradually increased with the Bank of Canada’s (BoC) rate hiking cycle. The timing and magnitude of BoC’s hiking path was not easily predictable however, with inflation and growth offering several head fakes through 2023, prompting calls for a pivot as early as last spring following the U.S. banking turmoil which threatened to spread to other parts of the world. The worst-case scenario did not materialize though, while at the same time, inflation and various metrics of growth began to trend higher into the summer months, prompting the BoC to restart the hiking cycle. We believe this likely caused some buyer’s remorse for investors who locked in GIC rates early, only to see them continue rising and missing out on the additional yield.
But even if they were able to time their investment to coincide with the peak of the rate cycle (a notoriously difficult task even for professional money managers), GIC investors would still have been short-changed, having gained no benefit from the subsequent drop in yields later in the year, and missing out on a large percentage of the year’s fixed income returns which bond investors fully captured in the 4th quarter of 2023.
There are several additional drawbacks of GICs that funds in the AGF Fixed Income Suite potentially avoid, in particular the AGF Fixed Income Plus Fund and AGF Total Return Bond fund, discussed in this piece, making bond funds a better option for income investors as we approach the end of the current hiking cycle and the eventual pivot from the BoC. While the timing of the first-rate cut remains uncertain, we believe fixed-income investors who position themselves in the AGF Fixed Income Suite early on may potentially reap additional benefits not captured by GIC investors.
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Publication date: February 22, 2024