Government Budgets: Is the bond market broken for the average investor?

The regulators tell financial advisors that their clients’ need to have portfolios linked to their risk tolerance. Historically, they was accomplished with fixed income in portfolios. The rule of thumb was that the older you are, the safer your portfolio should be, the more fixed-income you should have. The problem for years now has been that bond yields have hit a level where after inflation (tax and fees) the investor is worse off every year. The yield-to-worst (similar to yield-to-maturity adjusted for callable features). For Canada, the entire bond market has a YTW of 1.58%. For the entire world of investment grade fixed-income, the YTW is 1.11%. They first came crashing down in the period around the European debt crisis in 2012 when Mario Draghi said they would do what it takes. Then again around the surprising results of the BREXIT vote in 2016. Those lows were shattered in the first few months of COVID19 in 2020.

There is rarely a week go by where we do not get a question on Berman’s Call that sounds something like: My bonds (GICS) don’t meet my needs, can you recommend a dividend paying stock that has 4-6% please. This central bank intervention (forcing yields lower) has lead many investors into higher yielding bonds not necessarily understanding the risks. It’s like asking for a dividend stock to replace fixed-income. There is a dramatically different risk profile to high yield (junk) bonds or equities compared to investment grade or government debt.

The chart shows how low credit spreads are and it’s unbelievable how tight junk bond spreads are. They are clearly the riskiest they have ever been. Investors are simply not being compensated for the extra yield. Even in the high quality investment grade universe barely over 2% does not keep up with prevailing inflation expectations.

And to make matters worse now adding in that the central banks of the world seem to want more inflation, which makes owning bonds even riskier. In an environment of creeping inflation expectations even safe government bonds are not such good stores of (real) value either.

The bond supply coming in the next few years as deficits are exploding will make balance in portfolios an increasing challenge. The Federal Reserve and the Bank of Canada talk about normalizing. Laughable…they will be forced to monetize debt as far as the eye can see. Can’t wait to hear when Canada will balance its budget again!
Federal budget 2021: Freeland to reveal billions in new spending, deficit under $400B, says source | CTV News

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This week in our weekly Thursday Spring 2021 Berman’s Call virtual roadshow we will focus on budgets, taxes and the use of fixed-income in your portfolios in the years to come. Register at or at  The format this series will be a 30-40 minute weekly presentation that changes each week to current market developments and a 30-40 minute Q&A.

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One thought on “Government Budgets: Is the bond market broken for the average investor?”

  1. Avatar
    Ric says:

    I am retired with no company pension. I told my financial advisor at a major Canadian bank that I wanted low cost low volatility investments targeting 3-5% returns. I told him preservation of capital is most important. He advised me to invest approx. 40%in a balanced equity fund, 50% in a bond fund and 10% in a higher risk/higher return fund. All was ok until Q1 2021 when the bond fund dropped more than 5%. Sure I’m still getting reinvested bond returns but I have lost a lot of capital, at least on paper. Should I take the capital loss on the bond fund and get out now in case the bond fund keeps losing value?

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