The Rally that Investors Might Miss

4 minute read • December 6, 2023

Sometimes, the most significant opportunities are the ones we overlook. As investors flock to the seeming safety of high-interest savings accounts and GICs, a potential rally in the bond market looms—are you prepared to seize an opportunity that many might miss?

The Match

Private and retail investors have become increasingly attracted to high-interest savings accounts and GICs. It’s no surprise, given the low-interest rates for over a decade. Since the Great Financial Recession in 2009, prevailing interest rates in North America have, for the most part, been below 3% and, at times, closer to 0%. The yield or income starvation investors experienced throughout that time has led to some pent-up demand and makes current GIC rates attractive. But in the process, are they potentially leaving something on the table?

Bank of America Fund Manager Survey

The Bank of America Fund Manager Survey may help answer this question. The survey provides insight into what professional fund managers think and how they position their portfolios. The recently published surveys (September 2023 and October 2023) highlighted a few interesting insights:

September and October 2023 survey highlights:

  • 56% of respondents expect bond yields to be lower in the next 12 months, the highest on record since 2003.
  • 60% of respondents are convinced that the Federal Reserve has finished its rate hike cycle.
  • Investors turned the most bullish on bonds since the global financial crisis on “big conviction” that (interest) rates will move lower in 2024.

These anecdotes paint a relatively clear picture. North American central banks have been increasing interest rates to tame inflation. Their goal is to do so while not causing collateral economic damage. Whether a hard landing (negative economic growth) or a soft landing (maintaining positive economic growth) will be achieved is yet to be determined. Despite this uncertainty, fund managers believe central bank rate increases are behind us; rates will likely move lower in 2024, and the next central bank action will be interest rate cuts in 2024.

The Technical

Interest rates moving lower causes bond prices to appreciate. It would be a positive outcome for Matco’s Fixed Income Fund, which has increased its sensitivity to interest rates over the last 12 months (extending duration). In addition, the current yield of Matco’s Fixed Income Fund is hovering near 4%, and the yield to maturity is approaching 5%.

If interest rates do move lower in 2024, the total return would be a combination of the 4% current yield plus any capital appreciation of the bonds held within the portfolio. To put this into context, a 0.50% move lower in interest rates would result in capital appreciation of approximately 3.8% (total return of 7.8%). If interest rates move lower by 1.0%, the result would be a capital appreciation of approximately 7.7%. (total return of 11.7%). These estimates are concluded by examining Matco Fixed Income Fund’s current duration and serve as estimates. If interest rates increase, approximately the same amount of capital depreciation would occur. Therein lies the risk.

The Bank of America Fund Manager survey indicates that fund managers are willing to take this risk based on their economic outlook, interest rates and capital markets. The chart above shows that fund managers have turned the most bullish on bonds since the global financial crisis on “big conviction” that (interest) rates will move lower in 2024.

Matco’s View

Private and retail investors who have navigated towards high-interest savings accounts and GICs may very well miss out on a rally in the bond market if interest rates move lower in 2024. For some, the certainty of GICs is worth the opportunity cost. However, Matco’s asset management view and positive outlook for fixed income is based on the following:

  • Whether it is a hard landing or a soft landing, growth is poised to decelerate.
  • If a hard(er) landing is the result, fixed income historically protects the downside in equity markets.
  • Current yields offered within fixed-income markets are attractive.
  • The overnight interest rate swap market is pricing in two to three interest rate cuts in 2024.
  • As highlighted by the October updates, inflation in the U.S. (3.2%) and Canada (3.1%) continues to trend lower, reinforcing that the path of least resistance for interest rates is lower, not higher.

We’re humble enough to understand that any outlook accompanies uncertainty. As investment managers, we aim to understand risk and return outcomes based on current and anticipated economic data. We are the most constructive we’ve ever been in the fixed-income asset class in over five years and are positioned to participate if a rally arises.


Trevor Galon

Trevor Galon CFA

Chief Investment Officer

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