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Is a bond rebound on the horizon?

23 November 2022 by National Bank Investments
NBI Insights Bulletin – December 2022

The fixed income market has proven a challenging environment for investors in 2022. Trends, however, much like promises, are made to be broken. A reversal could turn out to be a golden opportunity for those swift enough to catch bonds on the rebound.

The environment

Amid the highest inflation numbers seen since another Trudeau was Prime Minister, central banks the world over adopted a decidedly hawkish stance by repeatedly hiking interest rates in the last several months. Bond yields rose and prices fell as usual during a credit tightening cycle. 

Canadian Consumer Price Index vs. iShares Core Canadian Universe Bond Index ETF
Data as of September 30, 2022. Source: StatCan and NBI

A possible reprieve

Capital markets anticipate events and current interest rate levels indicate that investors expect them to reach a plateau in the first half of 2023. Forecasters do not agree, though, on how long rates will need to remain elevated in order for inflation to be tamed and brought back down to the 2% target range which constitutes the objective stated by most central bankers. 

Three potential scenarios

  • If interest rates stabilize, bond investors could capture attractive yields until maturity. 
  • If a recession materializes and they fall, the potential for capital gains would offer an even more compelling investment narrative. 
  • If unforeseen circumstances result in further rate hikes, the high coupons would in large measure compensate the decline in prices. 

An opportunity to seize?

A substantial portion of assets have migrated to cash and its equivalents in a flight to safety during the period. Investors have benefited from the increased yields on short-term instruments and even resorted to buying good old GICs now that they provide decent returns. 

However, the time may have come to rebalance their portfolio and allocate once again to longer duration fixed income securities the amounts withdrawn earlier in the year. Among available solutions, high-yield bond funds present an opportunity with the most upside potential. The risk involved is greater, but the reward may prove more bountiful than those who choose to stay on the sidelines can imagine. 

Percentage bond yields to maturity
Year-to-date as of October 31, 2022. Source: NBI


Here are some NBI bond funds that may interest investors ready to jump into the fray. 

NBI High Yield Bond Fund F Series (NBC713)

NBI Sustainable Canadian Bond Fund F Series (NBC5752)

NBI Unconstrained Fixed Income Fund F Series (NBC705)

NBI Global Tactical Bond Fund F Series (NBC725)

NBI Bond Fund F Series (NBC740)

Legal notes

The information and the data supplied in the present document, including those supplied by third parties, are considered accurate at the time of their printing and were obtained from sources which we considered reliable. We reserve the right to modify them without advance notice. This information and data are supplied as informative content only. No representation or guarantee, explicit or implicit, is made as for the exactness, the quality and the complete character of this information and these data. The opinions expressed are not to be construed as solicitation or offer to buy or sell shares mentioned herein and should not be considered as recommendations.

NBI Funds (the “Funds”) are offered by National Bank Investments Inc., a wholly owned subsidiary of National Bank of Canada. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently, and past performance may not be repeated.

National Bank Investments is a member of Canada’s Responsible Investment Association and a signatory of the United Nations-supported Principles for Responsible Investment.

© 2022 National Bank Investments Inc. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank Investments Inc.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under licence by National Bank Investments Inc.

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