The $25-B question: should money-market investors pivot into longer-duration bonds?

Recently, Guardian Capital launched its GuardBonds suite of defined-maturity bond funds, which each hold a portfolio of corporate bonds set to mature on a specific year. Noble says the GuardBonds 2024 maturity bond fund holds bonds with a current weighted-average yield to maturity of 5.25%.

“You’re already generating a higher yield than a cash alternatives product with the same risk characteristics,” he says. “The difference is you’re not having to worry month to month about interest rates declining.”

From his vantage point, Noble sees markets currently pricing in a Goldilocks scenario for bonds in 2024, which includes six interest rate cuts within the year. Noble argues those expecting a quick barrage of rate cuts could be disappointed, which could drive some near-term volatility in bond markets.

Despite the recent market rally in the last quarter of 2023, Noble says the majority of corporate and investment-grade bond issuances in Canada are currently trading at a discount. For investors who are able to buy such bond issuances and hold them to maturity, that creates a fairly high certainty of a capital gain, making their return profile relatively more tax-efficient than products like GICs that pay out as pure income.

“If you’re holding bonds to maturity, you don’t really care what the daily NAV of the bonds is. You don’t really care about volatility in investment-grade bonds,” he says. “All you care about is that you’re being paid a certain level of income, and that these bonds are going to mature at their par value.”