Be cautious on international bond risk

When it comes to government bonds, it may be best to shop local this year.

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Not only are domestic government bonds still attractive, but “there continues to be a lot of downward pressure on the BoJ and the ECB, in particular, to keep interest rates very low, and the starting points are already extremely low,” says Luc de la Durantaye, head of asset allocation and currency management at CIBC Asset Management.

“We’re talking about 0% on 10-year Japanese bond yields and, in Europe, anywhere between 0.3% and 0.8% for the core European government bonds.”

As well, “we have political risk in Europe that could erupt in 2017,” says de la Durantaye, who manages the Renaissance Optimal Inflation Opportunities Portfolio.

“So we’d rather shy away from international government bonds, at least for the first part of 2017,” he adds. His underweight in such bonds reflects that view.

Read: Fixed income prospects for 2017

He finds Canadian government bonds are also still attractive relative to corporate bonds, noting, “the credit rating is still relatively attractive.”

Plus, says de le Durantaye, “we expect the Canadian economy to lag the U.S. economy, and the Fed also is expected to raise interest rates. That’s expected to put added pressure on U.S. rates more than Canadian rates.”

As such, the Bank of Canada “will likely have a very different direction than the U.S. economy and, therefore, monetary policy in Canada will be steady [and will] put less pressure on Canadian bonds.”

Read: Where to look as U.S. rates rise

Still, domestically, de la Durantaye prefers corporate bonds and high-yield bonds over government bonds for 2017.

Read:

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