Where the latest BoC hold leaves fixed income allocations now

“We’re seeing that core inflation number stay close to target, it’s telling us that this is a supply shock. It’s not an overheating economy. So raising rates wouldn’t actually fix the problem. It would actually do the opposite. It would slow down and act on an already fragile growth economy. So the rate decision to us made sense,” Bredo says. “one thing worth flagging based on the decision is what we saw after the release. We saw bond yields and the loony both tick up a little bit. That tells us that the market’s read on the tone was more cautious on inflation than what the market had priced in. Not a hawkish surprise, but a nudge towards ‘don’t expect rate cuts anytime soon.’ A small move, but if it’s the story that while the bank held the underlying, they’re going to be watching it very, very closely.”

What stable at 2.25 per cent means for fixed income allocations

Bredo accepts that rates sitting on the low end of normal leaves income-focused clients, especially retirees, in a more challenging spot. People who might have enjoyed strong returns from their fixed income allocations at the peak of interest rates in 2023 are now being forced to look either further out on the curve or down in credit quality. Both options could involve risks a client can’t tolerate. The temptation, Bredo says, can be to sit in cash and lose ground to inflation, or to add risk and chase yield.

While current rates might put some clients in a tight spot, Bredo frames this as an opportunity for advisors to plan. With rates now apparently settled into a safe spot for the Bank of Canada, advisors can work with their clients on a more stable expectation of what they will earn, which he prefers to the moving targets that advisors had to chase in the post-COVID interest rate hiking and cutting cycle.

With that stability, Bredo says that advisors can add in those other sources of yield, be that maturity or credit rating, slowly and in ways that suit client risk tolerance.

Where to allocate and how to explain it

He still prefers to stay on the shorter end of the yield curve to avoid some of the macro risks that overhang long-duration Canadian bonds. He adds that longer-dated Canadian bonds carry a heavy correlation to global bond markets, so even if Canada exercises relative fiscal restraint compared to its peers, a bond market reaction to sovereign debt levels in the US or UK, for example, could see a serious downturn in the value of long-dated Canadian bonds as well. Beyond the risk, that’s also a deeply difficult phenomenon to explain to clients.