June edition of Portfolio Construction — Interest rates are headed higher, so why invest in bonds?
Interest rates in Canada and the U.S. are expected to head higher over the next two to three years. This statement can be made with some confidence, especially given that central banks themselves have signalled more interest rate hikes. As a result, it is often inferred with certainty by some investors that bonds must therefore be headed lower given that bond prices decline as yields rise. However, they may be forgetting that the expected path of interest rates set by central banks is already priced into the bond market. And, for the price of a bond to decline, its yield, which already captures the expected interest rate path and inflation expectations, would need to rise from current levels. In other words, there would have to be expectations for further rate hikes in addition to the currently expected rate increases. This is far from a certainty. Read more.
