BMO Global Asset Management portfolio manager speaks out on BoC’s rate strategy

Alfred Lee speaks to WP about the BoC’s recent moves and explain how investors can best navigate the current environment

BMO Global Asset Management portfolio manager speaks out on BoC’s rate strategy

Concerns over household debt and the need to protect the loonie means the Bank of Canada (BoC) was right to hold steady on interest rates.

That’s the view of Alfred Lee, Director, Portfolio Manager, Exchange Traded Funds, BMO Global Asset Management (GAM), who said that despite a rising-rate environment, investors can still earn positive returns with broad-based, fixed-income ETFs.

Lee did warn, however, that if the central bank does begin to hike rapidly it will risk creating a headwind for the economy and put exporters at a disadvantage. Lee said that last year’s increases got people overly hawkish about what the BoC would do in 2018 and added that, compared to the U.S., Canada’s economic recovery is less robust.

“I think there are a number of things that still present risk in the environment. For example, household debt is still at a record high right now,” Lee said. “When the interest rates were low a lot of Canadians ratcheted up their debt by buying bigger homes. If the Bank of Canada raises rates too quickly, it could create a headwind for the economy. The economy needs to show it is standing on its own two feet before we start raising rates more aggressively.”

Lee also highlighted Canada’s reliance on exports and said that the loonie’s current position – about US$1.25 – is still relatively attractive for businesses this side of the border.

He said: “If we raise rates too quickly, the Canadian dollar is going to gain, which makes it a disadvantage for exporters. Leaving rates where they are right now is the right strategy.”

Lee said the BoC’s current steady hand allows the market to digest higher rates as they happen. If they are raised too quickly, he said, the bond market will suffer like it did in the late 1970s and 1980s.

He also believes that because aging investors are de-risking their portfolios, moving from equities to bonds, it increases the importance of stability.

For BMO GAM, this highlights an area where advisors and investors need more fixed-income related tools and support.  “When you go out to dinner parties, very rarely do you hear people talk about the next top bond tip, it’s always stock tips. The reality is a lot of people don’t understand bonds,” Lee said.

“We’ve developed a fixed-income primer, which talks about the risk factors that have an impact on bonds in general. Also, our new “"Fixing Your Bond Portfolio” whitepaper talks about the economic rationale behind various shifts in the yield curve and, more importantly, which types of ETFs, or fixed-income ETFs, are expected to perform well in those kinds of markets.”

Fixed income is the fastest growing segment of the ETF market and BMO is leading the way with over 20 fixed income focused ETFs. As interest rates have normalized, adjusting fixed income allocations has become increasingly important and more investors are recognizing the value in actively managing their fixed income portfolios. Fortunately for investors, BMO ETFs offer broad, segmented and precise market exposures that can help investors actively manage their fixed income portfolios.

In response to the growing demand for fixed income ETFs, BMO recently added to its offering with the launch of three new vehicles segmented for the Canadian market: BMO Short-Term Bond Index ETF (ZSB), BMO Corporate Bond Index ETF (ZCB) and BMO Government Bond Index ETF (ZGB).

“It’s important for people to understand that bonds can perform well in this environment,” Lee said “A lot of people thought raising interest rates would be a negative overall for bonds, especially the overall Canadian bond market, which has a duration of roughly 7.5 years. In the last few years, broad-based fixed-income ETFs like BMO Aggregate Bond Index ETF (ZAG), have achieved positive returns as long term yields have remained consistent.”


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This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

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