Fixed income prospects for 2017

In 2016, several fixed-income sectors fell behind, says John Braive, vice-chairman of Global Fixed Income at CIBC Asset Management, and manager of the Renaissance Canadian Bond Fund.

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But now, “we think there [are] opportunities in a couple of sectors that have lagged. In the BBB sector, […] some of the telecoms have lagged [but] we think there are some opportunities there in the longer end of the curve.”

When it comes to REITs, Braive says there weren’t many new issues in 2016. “But we expect them to come back to the market in 2017. Their spreads haven’t moved much so they’re pretty attractive opportunities.”

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Banks and high-yield in 2017

A promising area for 2017 is the financial sector. Says Braive, “In the bank space, we’re going to get the new bail-in deposit notes. We’ve been doing a lot of research on this and think they’re worth it, and there’s going to be opportunity.”

Also, Braive and his team are positive on NVCCs, or non-viable contingent capital. In 2016, he says, “we made some big purchases there and they have really performed.”

In the high yield space, there are several attractive companies, he adds. “An example is Ritchie Brothers Auctioneers; they just came [out] with an issue in the U.S. that we bought for our portfolio. And, Mattamy Homes is [the biggest] builder here in Canada and they came out with a new issue [in 2016]. We bought a lot of that issue [as] we thought it was very attractive.”

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Still, says Braive, both Ritchie Brothers and Mattamy are opportunities he and his team found after considering several factors; their process involves assessing whether a company meets their credit criteria and offers an attractive spread.

Also, “we’re quite willing to talk to dealers and give them lead orders. That helps us get the issues that we want when they come to the market.”

A better year for liquidity?

In 2016, liquidity in the bond market was weak but steadily improving. Braive finds, “If you look at the year as a whole, we had record issuance in terms of investment-grade—up 7%. Year-to-date (as of December 14, 2016), we’ve had US$1.6 trillion of investment grade issuance in the U.S.”

In the U.S. high-yield sector, there were around 350 deals for US$224 billion, as of December 14, 2016, he adds. Says Braive, “Some expect that number to be lower in 2017 but that’s a pretty good number, and some forecasts are looking for a similar number [in 2017] or even higher.”

Read: How Canada’s banks are preparing for U.S. rate rises

One factor working against bond market liquidity in 2016 was the Volcker Rule, he notes. The intent of that rule is “to not allow banks to trade for their own account, essentially. But we think this will be pushed back, and I think that [would] be very good for liquidity for 2017.”

In fact, says Braive, “We [have] probably come to the end of additional [financial] regulations and capital rules—all of the type of stuff that came out after the global bust-up in ’08 and’09, [related to] credit and banks.” The direction will now reverse, he predicts, which “should be good for markets and good for liquidity.”

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