In the year 2023, global bond markets became the talk of the town, drawing attention to fixed-income markets that often fly under the radar for equity-focused investors. While the nuances of the bond market may not be on every Canadian's radar, its health significantly influences day-to-day life and economic realities in the country.
Experts emphasize that the bond market, also known as the fixed-income market, is intricately linked to Canada's economic success. It serves as the platform determining the lending capacity for banks and facilitates the federal government and corporations in accessing capital, explains Hank Cunningham, a fixed-income strategist at Odlum Brown.
In a recent interview, Cunningham highlighted the enormity of the bond market, stating, "The bonds market is 100 times the size of the equities market." It functions as a meeting ground for borrowers (corporations or governments) and lenders (investors or private equity firms).
To illustrate the mechanics, Cunningham describes a scenario where a government or corporation issues bonds, and investors purchase them, effectively lending money. Investors receive both their original investment and interest over the bond's maturity period, while the issuing entity gains access to necessary capital. Corporate bonds generally offer higher interest rates, known as yield, due to the inherent risk associated with a company's stability.
Participating in the bond market traditionally required a minimum investment of around $10,000. However, Cunningham suggests an alternative for everyday investors, mentioning bond exchange-traded funds (ETFs) that allow ownership of a fraction of various bonds at a more accessible cost.
Even for Canadians not directly involved in bond trading, their financial well-being remains intertwined with the bond market, according to Steve Locke, Chief Investment Officer of fixed-income and multi-asset strategies at Mackenzie Investments. Locke highlights that individuals seeking loans for mortgages or savings accounts are impacted by the bond market through interest rates set by banks.
Additionally, Canadian businesses are closely tied to bond market activity. Corporations often turn to the bond market to raise capital, fostering growth, increased employment, and expanded economic output.
As for the current state of Canada's bond market, Locke suggests that despite challenges such as persistent inflation and high-interest rates, the market exhibits strength. He attributes this resilience to sector stability and robust regulations, particularly in areas like financials.
"Stability promoted in some sectors such as financials in Canada has been created through good regulatory policy and supported by the rule of law," Locke notes. These elements serve as a strong foundation for issuing bonds in the public market.
In essence, the bond market is not just a financial playground for investors; it's a critical component shaping the economic landscape for all Canadians, influencing everything from personal finances to the prosperity of businesses and the nation as a whole.
