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Price of Bonds Yearly Review

Global Bonds Price Overview of 2011

Bond Market Overview of 2011

Even though most investors are aware of the advantages of possessing exchange-traded funds, individual stocks and global equity funds, global bonds have remained reasonably ambiguous. Russell Investments Canada research offers very good reasons to look at this inequity in the portfolio.

To begin with there is a shortage of diversification in the bond market in Canada, which is similar to the stock market. S&P/TSX composite index is dominated by resource stocks and government bonds are a part of the DEX Universe Bond Index, yardstick for bonds in Canada.

In fact more than 73 % of bond issued in Canada are by the government, which includes federal government, municipalities, provinces and government agencies according to Bilal Naqvi senior research analyst, Russell. Perhaps, this has made bond market in Canada very conservative.

Typically government bonds, being ultimate in security, pay lower rates of interest as compared to corporate bonds. This results in a lower yielding bond market for investors than anywhere else in the world. As an example consider United States, report from Mr. Naqvi says that government bonds make up for 41 % of the bond market there. In the bond market globally, debts issued by the government account for 60 %.

It is not just that the corporate bond market in Canada is small, but it is also offers 52% weight to the financial sector. It is best not to overrate the safety of high weighting financial companies. It can be seen from the Russell report how a few bond fund managers in Canada suffered in their returns due to the downgrade of Manulife Financial bonds during the financial crisis.

Stock market of Canada accounts for almost 5% of all global equities. The heavy weighting resource stocks have assisted in propelling the stock market in Canada in the last few years. Strong financial foundation of the country has pulled cash into the bond market.

It was noticed by Mr. Naqvi that Canadian company bonds trade at higher rates as compared to similar global companies with the identical credit ratings. Yields and prices move in opposite direction, so is not really good news for investors who require income generating bonds.

Canadian Bond Market Prices

This year the Canadian stock market has underperformed compared to other global markets due to weakness in resource stocks. Russell Canada’s fixed-income portfolio manager Greg Nott feels that the bond market could be in line to fall behind. He is expecting that the Bank of Canada will get more aggressive as compared to central banks like the U.S. Federal Reserve Board, in increasing the rate of interest in the coming months.

Bond market of Canada is very safe and that is why it has done well, but is it more secure compared to world’s other bond markets. The report from Mr. Naqvi states that the market in Canada is not really at an advantage for its credit quality.

A broad view on the same- Canada benchmark for the DEX Universe Bond Index has a real triple-A credit rating and is 52% weighted to bonds on the other hand an equivalent U.S. index is 78% with triple-A bonds. Meanwhile, the bond market globally weighting to triple-A bonds is same as Canada.

When considering default risk, the report suggests that Canada is at the same level as other parts of the world including the United States. No doubt some European countries working at managing their debt loads have to be excused.

Mr. Nott segregates institutional bond fund managers in two sections one who develop portfolios comparable to the DEX universe index and others who venture beyond Canada-only benchmark. Typically in the other group 0 to 40 % of bond portfolio is invested out of Canada. High-yield and emerging-markets bonds can be a part of that mix.

United States Bond Market

Mr. Nott gives a couple of advice for investors looking for global bonds in their portfolio, one to have a fund approach than to purchase individual bonds. According to him it can get tough for advisor or an investor access few of the market segments globally and it is recommended to have a fund solution. This will aid you get access as well as diversification.

Another advice from Nott is to select funds that employ currency hedging; it can be a slightly controversial position. After a rally for many years, some feel that there can be a continuing downside to the Canadian dollar than upside. This is useful for an un-hedged technique and a falling dollar can add to increase in assets in foreign currencies.

According to Mr. Nott global exposure can perhaps add a percentage point to the bond portfolio profits. On the other hand volatility due to foreign currency exposure can result in the going up or down of the fund value easily by 3 to 5 or even 10 % points.

It is good to note that global bond funds have been the strongest performers even during 2008 among all fund categories. This was because investors around the world created the security of the government bonds as well as due to fall in the Canadian dollar. The average profit on global bond fund in 2008 was 19.1% while an average Canadian bond fund earned 2.8 per cent.

Canadians are recognised for investing at home and this preference is especially seen in bonds as compared to stocks. Canada’s Investment Funds Institute Data suggests that global bond funds signify around 18 % of total bond funds assets while international and global equity funds account for just a little above 1/3rd of equity fund assets.

It has been noticed by Mr. Nott that the institutional investors are lately increasing their global bonds holdings.


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