Is This Time Different- Unpacking Bond Yields

In Our Elevator Pitch For Bonds, we ask, “is this time different.” 

Our view of the attractiveness of bonds can be honed into an elevator pitch. It essentially boils down to a straightforward question – Is this time different?

Have the forty-year pre-pandemic economic trends reversed, and the economy’s inner workings changed permanently over the last three years? expectations

More specifically, are slowing productivity growth, weakening demographics, and rising debt levels about to reverse their prior trends and become a tailwind for economic growth?

NO, this time is not different. Yesterday’s economic headwinds have not vanished. They will eventually overcome the massive pandemic-related stimulus that continues to prop up the economy.

This article employs a classic bond model that allows us to solve for the expected economic growth as implied by bond yields. As you will see, the bond market believes economic growth will be significantly higher than expectations for the last 20 years. If they are correct and this time is different, current bond yields may be fair or even too low. However, if this time is not different, the market is grossly offside in its growth expectations, and bond yields are too high.

Decomposing Bond Yields

U.S. Treasury bond yields are a function of three factors: term premium, inflation, and economic growth expectations. Because Treasury securities are considered risk-free, credit risk is not a factor. For more on that, please read our recent article, Risk Free Government Debt- Fact Or Fiction.

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Term Premia

Term premium, also called term premia, is the amount by which the yield of a long-term bond exceeds the expected yields of short-term bonds. It quantifies the amount investors expect to be compensated for committing to one long-term interest rate versus a series of shorter-term interest rates.  

Term premia is not an

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Tips for investors who want to lock in today’s high bond and GIC yields for the long term

The significant progress in conservative investing correct now is the reluctance GIC issuers are showing to jack up premiums on for a longer period phrases.

Five per cent yields on a person-and two-12 months assured investment decision certificates had been available this 7 days from each option financial institutions and on the internet brokers. But when you get into phrases of 3, 4 and five many years, prices peak at ranges in the substantial 4-per-cent array. This is important simply because 5-yr Authorities of Canada bond yields, which impact five-year GIC fees, have jumped in the past pair of months.

GIC issuers plainly really do not want to maximize five-12 months GIC charges. The rationale appears to be to be that they do not feel bond yields will remain that large for long. Why commit to having to pay 5 for every cent for 5 yrs when you really do not have to?

It is a distinct tale in the bond industry, wherever 5-per-cent yields can be easily locked down right now with both person corporate bonds and trade-traded resources. The iShares Core Canadian Corporate Bond Index ETF (XCB-T) experienced an soon after-price weighted normal generate to maturity of 5.1 for each cent in early June, which is the finest tutorial to the yield you really should assume likely forward.

On the net brokerage bond inventories these times involve a fair selection of financial commitment-grade corporate bonds that provide yields of 5 for every cent or marginally extra and mature in one particular via 20-additionally many years. Expense quality implies a score of BBB or larger, which in switch signifies a sensible level of money balance or superior. Bonds rated beneath BBB are categorized as higher-yield bonds, aka junk bonds.

Bonds issued by the likes of Lender of Montreal, Royal

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