Investing in Bonds: The New Yield Opportunity | Portfolio Manager Views Podcast

Yeah, exactly.

So two things there.

I remember when we were talking about supply and demand, what the consumers were doing, I remember that whole debacle with toilet paper, how you couldn't get enough.

It was kind of just a memorable time, I want to say.

And then, of course, central banks, they did respond quite aggressively with one of the fastest rate hiking cycles in modern history, as you mentioned.

And so what that meant is bond yields went up.

And when bond yields go up, prices – behave inversely.

So bond prices went down and of course, bond investors, they experienced significant losses there.

And as you said, in Canada, it went from 25 basis points to 4.25. And what that meant for many consumers, investors, Mortgage rates, they were higher.

Financing a car, that was higher.

And we know that depending on who the borrower is and how risky they are, those borrowing rates differ from one person to the next.

Yeah, you're right.

The concept is the risk-free rate, right? And for any bond or borrower or whatever loan that was created during or before that big hiking cycle, that interest rate on that needed to adjust to be higher than the policy rate because the policy rate was the ultimate risk-free rate.

So that is that credit spread that you're sort of implying there.

And beyond that adjustment, just on the rate side itself, Because borrowing costs were higher, that created concerns around the market that, is the economy going to slow down? Are we going to see a recession? Are we going to see default rates start to rise? So credit spreads or risk premiums also blew out and credit didn't perform very well.

Equity markets were concerned about all of that, and particularly the recession.

Whenever you hear recession, equity markets sell off.

So we had a big sell off there as well.

And as you said, there was really nowhere to hide in 2022.

That traditional benefit if you will from diversification owning stocks and bonds really didn't work that year

Yeah, exactly.

So two things there.

I remember when we were talking about supply and demand, what the consumers were doing, I remember that whole debacle with toilet paper, how you couldn't get enough.

It was kind of just a memorable time, I want to say.

And then, of course, central banks, they did respond quite aggressively with one of the fastest rate hiking cycles in modern history, as you mentioned.

And so what that meant is bond yields went up.

And when bond yields go up, prices – behave inversely.

So bond prices went down and of course, bond investors, they experienced significant losses there.

And as you said, in Canada, it went from 25 basis points to 4.25. And what that meant for many consumers, investors, Mortgage rates, they were higher.

Financing a car, that was higher.

And we know that depending on who the borrower is and how risky they are, those borrowing rates differ from one person to the next.

Yeah, you're right.

The concept is the risk-free rate, right? And for any bond or borrower or whatever loan that was created during or before that big hiking cycle, that interest rate on that needed to adjust to be higher than the policy rate because the policy rate was the ultimate risk-free rate.

So that is that credit spread that you're sort of implying there.

And beyond that adjustment, just on the rate side itself, Because borrowing costs were higher, that created concerns around the market that, is the economy going to slow down? Are we going to see a recession? Are we going to see default rates start to rise? So credit spreads or risk premiums also blew out and credit didn't perform very well.

Equity markets were concerned about all of that, and particularly the recession.

Whenever you hear recession, equity markets sell off.

So we had a big sell off there as well.

And as you said, there was really nowhere to hide in 2022.

That traditional benefit if you will from diversification owning stocks and bonds really didn't work that year