Mackenzie Minute: August 4, 2017
Dan Cooper, Portfolio Manager on the Mackenzie Fixed Income Team, discusses the recent rate hike by the Bank of Canada and the strength of the Canadian dollar.
DAN COOPER: The Bank of Canada’s become more hawkish than expected and actually began unwinding some of those emergency rate cuts that they put in place back in 2015 to deal with that low oil price environment. So in July, we saw the Bank of Canada hike the overnight lending rate from .5% to .75% and that’s significant because that’s the first time that we’ve had a rate hike in Canada since 2010.
Hawkish tones out of the Bank of Canada and global central banks have created a bit of a backup in rates globally, but it’s particularly acute in Canada, given the fact that we’ve seen the 10-year yield rise from 1.4% to 2% and that’s because further rate hikes are expected and are starting to be priced into the market.
We’re keeping our eye on the Canadian dollar, which has already strengthened from 73 cents up to 80 cents over the last few months in anticipation of further rate hikes. A strong Canadian dollar could have negative implications for the Canadian manufacturing base, particularly our domestic auto sector, so we can see the Bank of Canada maybe softening their hawkish rhetoric because they did say that further rate hikes would be data dependent. We’re also watching the Fed for any hints that they’re going to raise rates any further or unwind the balance sheet, which would cause a backup in rates.
My area of focus within fixed income is on the high yield market, where approximately 60% of the market is now yielding less than 5%, which is expensive from a historical perspective. The Mackenzie Fixed Income Team has largely avoided those expensive areas of the market, given the flexibility that we built into the mandates to invest where we see the most value or where we see the strongest risk-adjusted return profiles. So rather than holding those expensive, double B paper with duration risk, we have it tilted towards single Bs, where we see better value. We also have a tilt towards the leverage loan space, where we can capture a very similar yield to high yield, but with less interest rate risk and they’re generally known to outperform in a rising rate environment.