Fixed income opportunities in the current interest rate environment

Spector says he thinks there will be further monetary tightening, which will have implications for short-term interest rates, but he doesn’t expect these will be sustained for a long period and the bulk of increases may have already occurred.

Opportunities in Canadian Fixed Income

Spector says that the current environment may mean investors want to shift where they allocate risk toward duration and away from lower quality credit risk.

Investors can either buy longer-term bonds or seek credit risk for yield. However, he says he thinks that credit markets are currently “priced to perfection” so there may be better value and better opportunity in interest rate risk than lower-quality, higher-risk opportunities available in the credit market.

He also says there is opportunity in medium-term interest rates because the government yield curve is extraordinarily flat, although not inverted, and he thinks that signals that the Bank of Canada is not behind the curve and doesn’t need to go out on a very extended monetary policy cycle.

“I think if we do see the Bank of Canada pause earlier than the market expects there would be scope for those medium term, or five and 10-year interest rates, to outperform.”

Opportunities in Emerging Markets

Spector highlights that when the U.S. Federal Reserve tightens monetary policy, this has implications for interest rates, credit markets and bond markets around the world. Particularly, the rising U.S. dollar, alongside tightening monetary policy, has created dislocations in emerging markets, he says.

Spector says this may offer Canadian investors an opportunity to look beyond the Canadian bond market, which is highly concentrated especially in the corporate space.

“So it does make sense from a diversification perspective to look beyond Canadian corporate bonds and try to incorporate other companies, other sectors, that aren’t as well represented in the traditional Canadian bond benchmarks.”