Friday, September 16, 2011

Money Show, Andrew Mystic

Andrew Mystic is from Scotia iTrade. His talk was on The Bond Market: The Reality and the Road Ahead.

There is a big spread between government bonds and corporate bonds. We should be buying corporate bonds. However in Canada 65% of corporate bonds are bank bonds. Bonds yields are at historical lows. Bond yields can only go up. This will occur in 1 or 2 years’ time and then bonds prices will fall. The only place to be today is in short term (2 year) bonds. In recent times, interest rates rose more rapidly than today.

There are many concerns. First is a Greece default, and then perhaps Spain, Ireland and Portugal will default? The second worry is the US debt ceiling debates. The third worry is US credit rate cut to AA+ from AAA. Because of these concerns you would have expected bond to go down and interest rates to go up. However, this did not happen because in the crisis people turned to US bonds.

There are other concerns, such as US growth and their unemployment data, the continuing disaster in Japan, talks of QE3, the Federal commitment to put interest rates on hold until mid-2013 and German and French credit ratings.

As investors we should be underweight in fixed income products. We should only buy fixed income products with short terms and avoid all long term bonds. We should be overweight in corporate bonds. We should add to our allocations for high yield using Mutual Funds and ETFs.

If you on in 5 or 10 year bond ladders, you should take profits and then only go for short term bonds. You can again go to long term bonds when yields go up. High yields bonds are only for anyone who can stand the risk. They should only be a maximum of 5% or your portfolio. Bond ETFs can give you diversification. The Canadian dollar will continue to outperform the US dollar. If you build a bond ladder you need at least $100,000. If you have less or a small amount, like $10,000, you would buy bonds ETFs instead.

Outstanding Bank Capital Trust/Tier 1 and preferred shares will no longer be Tier 1 capital and then will have less security in their covenants. This will start to occur in 2013 and continue to 2022. (I have always found preferred shares features confusing and you really have to look into a company’s financial statements to find out what the features are for each of their preferred share issues.)

If you buy bonds, stay in Canadian Banks. Do not buy US or European Banks and do not buy government bonds. US corporation bonds are also fine.

If the US goes into a double dip recession, US treasuries will probably rally. This is counter-intuitive, but it is what will happen.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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