Poloz makes right call for fixed-income markets

Traders looked for buying opportunities in corporate bonds, and outside Canada, as the Bank of Canada held its fire amid lower growth forecasts and a reorienting economy.

The Bank kept its benchmark interest rate at 0.5% and signaled a wait-and-see approach to a Canadian economy adjusting to a low loonie and oil prices.

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“They were not hinting toward any more rate cuts later in the spring. They will be waiting for the fiscal stimulus in the federal budget,” said Stéphanie Lessard, vice-president of money markets at CIBC Asset Management.

She adds the decision not to cut was good for fixed-income markets. “It’s really hard to give a good return to your investors [in fixed-income markets] when your rates are close to zero.”

While Canadian government bond rates are low, there are good investments to be made in high-quality corporate bonds outside the energy sector, she said.

Chhad Aul, portfolio manager for Sun Life Global Investments, said in an interview before the BoC announcement that, cut or no cut, Canadian investors would be looking abroad.

“The Canadian economy is going to need some time to really recompose itself from an over-reliance on investment in the oil patch and trying to bring manufacturing, trying to bring exports, back online. It’s going to take a considerable amount of time,” Aul said. “When it comes to an investment perspective, it’s going to be important to maintain your global diversification and make sure that you’re looking for opportunities outside of Canada.”

Read: Manufacturing and wholesale sales posted gains in November

Aul said a 25 basis point cut today would have had limited effect, given that one of the goals of last year’s monetary easing was to pull down the loonie in support of exports and manufacturing. Driving the dollar down further now could negatively impact consumer spending, he said.

Benjamin Tal, deputy chief economist for CIBC World Markets, said too many investors were opting to hold their money as cash. “I think the eurozone will be a surprisingly interesting place,” he said, suggesting high-quality equities with exposure to gold and bonds.

Yesterday, traders were more or less evenly split on whether the Bank would cut.

The BoC, which cut its benchmark rate to 0.25% amid the 2009 crisis, said the economy is evolving broadly as expected. It calls for global growth to trend upward this year with the U.S. economy on track and a slowing China on a “more sustainable growth path.”

The Bank said it considered the complex forces arising from low oil prices: Canada is earning less income from the rest of the world, the resource sector is shrinking and the Canadian dollar is depreciating, all while the non-resource sector expands.

“That is a lot of structural change,” said BoC Governor Stephen Poloz. “One implication is that it may take up to three years for the full economic impact to be felt, and even longer for all the of the structural adjustments to take place.”

The BoC forecast flat annualized growth for Q4 2015, a downward revision of its previous prediction of 1.5%. It also lowered its 2016 growth forecast from 2.0% to 1.4%; and for 2017 from 2.5% to 2.4%.

Read: Low oil complicates struggle to raise eurozone inflation

Tom O’Gorman, director of fixed income for Franklin Bissett Investment Management, said the Bank appears to feel there’s enough stimulus in the system, for now. “They’re in a wait-and-see mode depending on the price of oil, the data and the government for the fiscal stimulus,” he said.

Given market volatility, he says corporate bonds remain a good option. “I could go on and on about bonds—where the benchmark interest rate, the bank interest rate, is very low but the yield you can get on corporate bonds is considerably higher,” he said.

The Bank said it expects the economy to use up its excess capacity around the end of 2017, moving back a previous prediction of mid-2017; and added it has not yet factored in any impacts of the federal government’s plans for fiscal stimulus.

The BoC assumes oil prices will remain “near their recent levels,” noting prices for benchmark West Texas Intermediate have averaged US$36 per barrel since early December. It acknowledged there remain near-term downside risks to its oil assumptions, given possible inventory increases and warmer weather.

Stock markets were having a rough go even before the BoC’s announcement. Canadian stocks, the loonie and oil took a further beating Wednesday, with the S&P/TSX composite index dropping more than 3% at one point during the day.