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Head Fixed Income trader | A discussion about fixed income, interest rates and opportunities

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Head Fixed Income Trader Harvey Libby, joins the podcast to discuss what is going in the fixed income market, including:

  • With interested rates on pause in Canada, what are some fixed income opportunities?
  • Best term to invest in?
  • How is inflation affecting fixed income?
  • The yield curve is inverted, what does that mean?
  • Thoughts on rates, are going higher or lower?

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Christopher Cooksey: Hello and welcome to The Advantaged Investor, a Raymond James Limited podcast. A podcast that provides perspective for Canadian investors who want to remain knowledgeable, informed, and focused on long-term success. We are recording this on February 15th, 2023. I'm Chris Cooksey from the Raymond James Corporate Communications and Marketing Department, and today I'm looking forward to chatting with Harvey, Libby Harvey as our head fixed income trader, and today we are discussing fixed income, interest rates and opportunities within that sleeve of the investment industry. Welcome Harvey. How are you doing today, my friend?

Harvey Libby: Not bad at all, Chris. Thanks for having me on here. Since fixed income is the new flavour of the year. Yeah, for 15 years I was doing nothing basically with 1% yields and now we get back up to 5% and our phones are ringing off the hook.

Christopher Cooksey: Well, it's nice that people didn't forget who you were. Yeah. . Well, we have a lot to get to today, so let's jump right in. And of course, the Bank of Canada [recently said they're going to go on pause and take the temperature out there in terms of interest rates. So maybe just talk a little bit about that and maybe some of the fixed income opportunities.

As you mentioned, your phone is ringing, so let's hear a little bit about those convers.

Harvey Libby: Okay. Well most conversations right now are short term still just because of the way the yield curve is. The yield curve right now is inverted, meaning that rates in the shorter end are higher than rates going out the curve or longer term.

So most retail will come in and say, I want 5%. Well, you can get 5% on a one year product, but you can't get a 5% on a five year product. So then that kind of pigeonholes or makes the client wanna stay short term. What we're saying and looking at economist views on the street is economists views on the street is by the end of this year, fourth quarter, 2023.

Rates will be lower and in a two year, like by about 80 basis points, a 10 year about 30 basis points and a long bonds about 30 basis points in yield. So it's kind of. You're getting trapped in buying a one year product. You're gonna buy a one year product because it's 5%, but after one year you have to reinvest for the client, and it's going to be lower yields as economists are showing here.

So what we are suggesting on the desk is, Try to buy longer term. So what we are selling a lot of are corporate ladders, three year duration sorry, three year term which makes it about a two year duration. Um, so it, you're not going out too long, but then each year you get to reinvest in something.

So each year, one product will come due, you re reinvest out to a longer term issue each time. If we get back to a normalized yield curve, which we will eventually hear where yields are higher as you go out the curve this will. This will come into play and it'll be worthwhile for you.

So like a three year corporate ladder I priced up this morning and you can get about a 4.82% on something like that with investment grade products.

Christopher Cooksey: And that would be blended over the course of the three years, is that correct?

Harvey Libby: Correct. So you're gonna get 5% for the first year, and then it's, you know, 80 or four.

Yeah, 80 and then 4 65 or something to the third year, which is a blended rate of 4 82 right now.

Christopher Cooksey: And so laddering basically is just, I got three thou, oh, use simple numbers cuz I'm simple. $3,000. I got 1000 in one year. I got 1000 in two year, and I got 1000 in three years. So they all come due at different times.

So you can take advantage of the interest rate environment as those.

Harvey Libby: That is absolutely correct, but I hope it's more than 1000 in each trade. , .

Christopher Cooksey: I got three kids, man. 3000 seems like a billion dollars to me anyway. So right now you're saying, in terms of absolute rates. The best term is one year.

But over the long term, that might not make more sense. That might not make any sense.

Harvey Libby: Absolutely, absolutely. I think you're getting I think the retail investors getting pushed into the one year product because of the enticing yield. I'm not saying if you need like one year, one year stuff, one year's cheap right now at 5% or close to 5%, you've got, you know, you should be buying it.

But I just, you know, one year from now, where are the rates gonna be? Well, economists are saying they're gonna be lower, so you, it might not be the right thing to do.

Christopher Cooksey: Right. Okay. Depends on your goals. Talk to your advisor. Of course. Yeah, of course. Inflation. Inflation all over the [00:05:00] news. Um, how is inflation affecting the fixed income market right now?

Harvey Libby: Well, the inflation is real yields end up being negative because inflation is so dramatic right now. Um, that is about the only thing that's going on, but with economists are also saying that uh, inflation should subside and get back to the 2% level within the next. , you know, eight months to a year out there.

And if that happens, then these absolute rates that we have in fixed income will become even more enticing than they are now. Um, it's been, like I said, it's been absolutely great having a, you know, close to 5% yield because, People are starting to wake up and pay attention again and actually do a 70 30 split or a 60 40 split, or, you know, whatever they should be doing instead of just being totally concentrated in equities.

Christopher Cooksey: No you mentioned we talked a bit about it off the top yield curve and that the fact that it's inverted and that means, of course, short term rates are getting a l a higher percentage of interest than you are on the long term, because as you mentioned, economists think the rates are gonna be lower in, in, in the future.

How often does this happen? What does it really mean?

Harvey Libby: Oh, it doesn't happen very often at all. Right. Um, I'm trying to remember the last time I saw it happen and I've been in the business for 30, 30 years. Uh, close to 30 years, I guess 28 years or something. Um, . Yeah. Um, it very rarely happens, but it tends to indicate that there's a recession coming.

But what economists are starting to say it's because investor, like the yield curve is inverted because investors are all pouring into the short end and thinking yields will [00:07:00] go, and, sorry, investors are buying the shorter term. Bonds and the shorter term bonds get more affected by the bank rate in Canada.

If there's a chance of them raising rates, the short term bonds will go up in yield. Okay. And there is still a chance. I don't think it's gonna happen. I think they're going on pause and then we're gonna see decreases in the. But that's, you know, my personal view, and it seems like it's most economists' view right now as well, but there is that view.

So then you have other people going out longer term three to five years and, and longer term they're, they're buying these in because of the view that rates will be going lower sooner.

Christopher Cooksey: Okay. Okay. So that transitions into great into our last our last point here around rates on, and whether you think they're going higher or lower.

You mentioned you think they're gonna go lower, and I know our colleague Nadine Kasam, who's been on the podcast many times, and he talks about pivot and whether we're gonna pivot and that means a change in direction. So you, you believe that we will be pivoting. Back towards a lower interest rate environment.

I'm not saying we're going back to zero by any stretch of the imagination,

Harvey Libby: I think we already started to do that. We started to do that in December when rates or I guess late November, early December when rates did Come down a lot from where they were. Um, and it's continued a bit here, but in the last for this month anyways, this month uh, yields have come up slightly, but I think it's just a matter of.

You know, them working themselves out because they came, they came down too fast, too quickly. Right? And people are still on the fence of, you know, what is inflation gonna do? What is a bank, what is the bank gonna do? Are they gonna raise rates or not? And that, and there's still so many uncertainties that I think it was just a moonshot.

and then it has come back and it's gonna level itself out. But yeah, going forward, I believe that rates will be lower this time, this time next year. And the other opportunity right now I think is in corporate issues, especially in Canada. In Canada, corporate investment grade issues. Most corporate investment grades in Canada are the banks, right.

I have. They do the problem. They do all money. They do. Okay. , they seem to make money. It doesn't seem to matter what they're doing. Yes, you get mad and they're spread over. Uh, a provincial bond in Canada is still very dramatic. It's about, I don't know, 50 or 60 basis points in the 10 year area, and I would take that pickup.

All day long because of the stability of our banks in Canada and our investment grade product. So I think right now you have to stick in corporate. So like I said earlier, a corporate three year ladder, perfect place to be right now. Um, At some point here we're gonna say provies and corps are getting too close in their yields.

So the spread over Canada, so the absolute yield of a three year corporate versus a three-year provies, it might get to a point where it looks like the corporate is trading too tight or not enough yield for the for the risk. And at that point you know, that might be a time to pivot, as Nadeem says, to another provies

But that's you know what, if you just buy a one to three year ladder, you don't need to worry about any of that stuff, right? And especially high quality stuff.

Christopher Cooksey: Well, awesome. Thank you so much for joining us today, Harvey. Really appreciate your time, and I hope you'll join us again as, as the interest rates are moving right now.

You're more popular, so maybe we'll get you on sooner.

Harvey Libby: Okay. Sounds good. All righty. Yep. Thanks Chris.

Christopher Cooksey: Reach out to us at the Subscribe to the Advantaged Investor on Apple, Spotify, or wherever you get your podcasts. Please contact your advisor with any questions you have.

And on behalf of Raymond James and the Advantaged Investor, thank you for taking the time to listen today Until next. Stay well.

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