The New Face of Fixed Income

Posted on July 16, 2017 by David Kindy

BY INVESTORS GROUP / JUNE 2017

For the last 30 years bonds have helped boost portfolios. With fixed income prices now falling, it’s time to rethink how these assets fit in a portfolio.

You might remember the 80s for its funny hairstyles, tight jeans and a variety of new-wave music. What may not come to mind is the start of a deflationary period that has created many happy bond investors.

Fast forward 30-plus years and the landscape is somewhat different – although funny hairstyles, tight jeans and experimental music still remain, creeping higher interest rates and signs of an inflationary environment means that gone are the days of viewing bonds as the path to greater returns.

So, then, what are they viewed as, and is there still a place for them in your portfolio?

a changing role

Simply put, when interest rates rise, bond prices fall. This is because investors won’t pay for a bond that has a lower interest rate, which ultimately decreases the value of the bond.

Beginning in the early 1980s, bond yields began to move lower as the threat of inflation subsided. This allowed investors to enjoy a combination of high current income and strong capital gains without much volatility – a trend that has been in place for several decades.

But now, with bond yields rising, fixed income prices are falling. As a result, their purpose in your portfolio is changing.

“The role that fixed-income plays going forward is really as a diversifier,” says Les Grober, Senior Vice-President and Head of Asset Allocation with Investors Group. “One of the big reasons investors still want to own bonds in their portfolio is that the correlation between bond prices and stock prices is still negative.”

Since bonds and stocks tend to move in different directions, from a diversification standpoint, owning bonds in your portfolio can reduce its overall volatility.

“Bonds still provide a safe-haven,” says Grober. “They’re there to preserve capital, and provide diversification benefits and dampen down one’s volatility in a portfolio. That’s a significantly different role than what they’ve played in the past.”

value of diversification

Steve Rogers, Investment Strategist with Investors Group Investment Management, highlights the value of this type of diversification.

“There’s always value in low correlation assets within a portfolio,” says Rogers. “Combining assets to improve returns, without increasing your risk, is key.”

a changing sentiment

Changing one’s view of the role fixed-income has been playing, from a portfolio booster to a diversifier can be a challenge for some investors, but adjusting your investment choices so they adapt to the current climate is important.

“We’re likely in the very early innings of an inflationary environment,” says Grober. “There’s big question mark about what that looks like and how we get there, but most people would agree that the deflationary risk we’ve been fighting since the financial crisis is ending.”

The new role that bonds can play in your portfolio is a good place to start, and advice from your financial advisor can help you make the decisions that are right for you.

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Why Are Mortgage Rates Rising?

Posted on July 16, 2017 by David Kindy

While Canada’s overnight rate hasn’t budged in a while, mortgage rates are climbing. Here’s why and what it means for you.

By Investors Group / January 2017

Over the last few years, buying a home has never been easier. Ultra-low mortgage rates – often in the two to three percent range – have helped many Canadians buy new homes and keep their monthly payments manageable. Low rates, though, have also played a part in fuelling the nation’s home prices: since 2008 the average Canadian home has risen by 60%, while the posted five-year fixed mortgage rate has fallen by 37%.

When it comes to finance, what goes down tends to come back up and as a result of changes to government regulations and increasing bond yields, it looks like mortgage rates are finally starting to rise. Here’s how rising rates might impact you.

Long-rates rising

Many of us like to talk about the Bank of Canada’s overnight rate, or the Federal Reserve’s Fed Funds rate, both of which are short-term lending rates. It’s the rate that central bank governors can directly control and the one they discuss when they hold their regular meetings.

However, it’s not the rate that impacts mortgages most. Rather, it’s the five-year Government of Canada bond yield that causes fixed-term mortgage rates to rise and fall, says Robert McLister, founder of the mortgage rate comparison website RateSpy.com.

The five-year yield has climbed from 0.48% in February 2016 to 1.13% at the end of the year, which has helped push mortgage lending rates higher.

Why the five-year bond? Because most mortgage terms are for five years and companies raise the money they lend by selling GICs, deposit notes and mortgage backed securities with a similar maturity.

Variable mortgage rates, however, can be priced at the prime rate or at a discount to the prime rate, which is set by financial institutions. The discount is determined by a lender’s short-term funding costs so the rate you pay can fluctuate throughout the term, says McLister.

Government intervention

Last year, the Canadian government decided that it needed to do something to cool the hot housing market and ensure that Canadians aren’t taking on more debt than they can handle.

It instituted new insurance restrictions and bank capital requirements, including a ban on insurance for refinances, extended amortizations and $1 million plus properties. These changes are making it more expensive for lenders to securitize or hold mortgages on their balance sheets, says McLister. “And that extra cost is being passed on to the consumer through higher rates,” he says.

As well, buyers must also now make a down payment of 20 percent or qualify for the Bank of Canada’s posted five-year fixed rate, which is currently 4.64%.

When taken together, these government rules “reduce competition for low-ratio mortgages,” says McLister, which then causes rates to drift higher.

The Trump effect

While Donald Trump’s election has buoyed stock markets, it’s also driven up long-bond rates in the States and in Canada – yields often climb here when rates in the U.S. rise. Bond markets are reacting to a potentially more inflationary environment under the new president.

“Trump is one of the most pro-growth presidents the U.S. economy has ever witnessed. Financial markets believe his tax cuts, infrastructure spending, deregulation and other policies are inflationary,” says McLister. “And when inflation expectations jump, bond yields rise.”

Since he was elected on November 8, the Canadian five-year bond yield has risen by about 0.4%. That has, in part, caused some banks to raise their prime rates on variable rate mortgages and rates on fixed-income mortgages, in some cases by between 0.25% and 0.4%.

What this means for you

With mortgage rates increasing, it makes it harder for first-time homebuyers to enter the real estate market. New buyers will be left with the choice to wait and save up more money for their down payment, or find a less expensive place.

However, there are still low mortgage rates to be had. Ken Walus, Assistant Vice-President of Mortgages at Investors Group, says that even if you don’t have the required down payment, and must qualify for a mortgage at the Bank of Canada’s posted rate, many lenders still offer variable or fixed rate mortgages that are below 3%.

But it’s not just the rate that matters, he says. Mortgages need to fit your lifestyle, too. If you want peace of mind about the mortgage rate you’ll be paying for the next five years, a fixed rate mortgage may be the right choice. If you are financially comfortable to wait and see what happens, a variable rate might be the answer.

“No one should be losing sleep over their mortgage rates,” says Walus. “Whether it’s a fixed or variable mortgage rate, you have to be confident that you’ve made the right decision.”

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BoC interest rate revealed

Posted on July 12, 2017 by David Kindy

by Justin da Rosa 12 Jul 2017

The Central Bank raised its new target for the overnight rate to ¾% Wednesday, citing a confident financial outlook and above-potential growth. This despite softened inflation, which the bank judges to be temporary. “Governing Council judges that the current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy,” the Bank said. “Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities.” The BoC estimates real GDP growth to moderate from 2.8% in 2017 to 2% in 2018 and 1.6% in 2019. “Canada’s economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed. The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential,” it said. “Growth is broadening across industries and regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding. “Household spending will likely remain solid in the months ahead, supported by rising employment and wages, but its pace is expected to slow over the projection horizon,” the Bank continued. “At the same time, exports should make an increasing contribution to GDP growth. Business investment should also add to growth, a view supported by the most recent Business Outlook Survey.” The Bank also cited strengthening global economy and a US economy that is solidly growing as factors for raising its rate. Europe is also experiencing above-potential growth. However, geopolitical uncertainty and softened world oil prices remain concerns.

 

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New individual tax identification renewal rules

Posted on July 9, 2017 by David Kindy

If you are living in Canada and are also a US Citizen, just another hoop to jump through.  Have a read below so that you stay up on your US/Canadian tax filing rules.  If you need help, give me a call.

David Kindy – Investors Group

Published on 1 June, 2017
| by Roy A Berg JD, LLM (US TAX)

The following article co-authored by Roy A Berg and Alexey Manasuev of U.S. Tax IQ first appeared in Canadian Tax Highlights, Volume 25, Number 5, May 2017

The IRS started to accept 2016 individual tax returns on January 23, 2017. A nonresident alien individual must renew his or her Individual Taxpayer Identification Number (ITIN) in order to file a 2016 tax return.  Failure to renew an ITIN at this time is almost certain to delay any refund claimed on the 2016 return.  Moreover, a taxpayer who must apply for or renew his or her ITIN but who resides outside the United States (including many a Canadian), must now budget more time for that process and also part with his or her passport for several weeks.

Amended Code section 6109 (section 203 of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), Pub. L. 114-113, div. Q, enacted December 18, 2015) made significant changes to the ITIN program in two major areas: (1) the ITIN expiration and renewal process; and (2) additional documentation requirements.

There was a third quite significant change, but it is moot as of the date of this article. Specifically, the IRS terminated the Certifying Acceptance Agent (CAA) Program outside the United States as of January 1, 2017. However, effective April 17, 2017, the IRS has restored the CAA Program outside the United States and the nonresident alien individuals can apply for ITIN through a CAA located outside the United States, CAA located in the United States, and via the IRS Taxpayer Assistance Center (TAC).

ITIN Renewal

Late in 2016, the IRS warned that a taxpayer who must renew an ITIN must file a renewal application by January 23, 2017 in order to accelerate the ITIN re-issuance time to about seven weeks. Now the likely processing time is 11 weeks or more.

Two broad categories of taxpayers must renew their ITINs. First, an ITIN that is not used on a tax return at least once in the last three years is invalid on the last day of the third tax year (Code section 6109(i)(3)(A)). This rule applies even if a federal return was not filed in those tax years but was required to be so filed: for example, not filing for 2013-2015 tax years means that the ITIN expires December 31, 2016 and that includes the ITIN of anyone listed as a dependant on the tax return. Second, a taxpayer whose ITIN’s middle digits were “78” or “79” – for example, 9XX-78-XXXX or 9XX-79-XXXX – must renew the ITIN, even if the taxpayer used it in the last three years. When an ITIN renewal application is made, it is not necessary to attach a tax return to form W-7, Application for IRS Individual Taxpayer Identification Number. The IRS allows all family members to renew their ITINs at once. Affected taxpayers should have received a letter from the IRS inviting ITIN renewal.

Additional Documentation Requirements

Pursuant to the new IRS policy, only a passport with a US entry date qualifies as a stand-alone identification document for a dependant. A taxpayer whose passport lacks the date of US entry into the United States must present additional supporting documentation to prove US-resident status. Acceptable documents include US medical records (for a dependant under 6 years old), US school records (for a dependant under 18 years old); and a school record for a student, a rental or bank statement, or a utility bill that shows the dependant’s name and US address (for a dependant at least 18 years and older). The rule on additional document requirements does not apply to a dependant from Canada or Mexico or to a dependant of US military personnel stationed overseas.

Conclusion

Persuading a non-US person to file a US tax return is even more challenging than before due to significant tax compliance costs, the high complexity of US tax law, and additional filing requirements.

It is clear that an ITIN applicant must anticipate more delays in the processing of his or her 2016 tax return and any related refund. A taxpayer who must renew his or her ITIN should do so as soon as possible to receive any refund within a reasonable, although extended, time.

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BoC interest rate hike in the cards?

Posted on July 5, 2017 by David Kindy

Next week (July 12), the Bank of Canada is scheduled to announce its latest decision on its interest rate—and the possibility of an increase has not been lost on various industry observers.

A hypothetical increase on the benchmark interest rate—which affects the rates that Canadian borrowers incur on their mortgages and other loan products—will mark the first such time in around 7 years.

“By the time Stephen Poloz was named to replace Mark Carney atop the bank in 2013, the central bank had already been on the sidelines for more than two years, its benchmark interest rate set at one per cent,” according to markets analyst Pete Evans in a recent piece for CBC News.

“But even as the bank kept loans cheap coming out of the financial crisis, the messaging from the top came early and often that Canadians should be forewarned — rates have to go up eventually,” Evans added. “As far back as 2014 Poloz warned Canadians that rates would rise ‘soon’ — before oil’s plunge in 2015 caused the bank to lose its nerve.”

Speculations of a hike intensified after a June 12 statement by senior deputy governor Carolyn Wilkins, who told a Winnipeg audience that the Canadian economy was starting to recover and “moving past” the oil shock.

“[It would be] imprudent to ignore the aggressive communication shift we have seen from the Bank of Canada,” Manulife senior economist Frances Donald added.

Scotiabank economist Derek Holt agreed, stating that the central bank’s statements have telegraphed a hike next week, and maybe even another one before the end of 2017.

“The Bank of Canada is going to have a serious credibility problem if it fails to raise interest rates … after providing such an aggressive turn in communications starting one month to the day ahead of the July meeting.”

“If they think [previous rate] cuts have done their job, now they can reverse them.” BMO economist Doug Porter said.

 

 

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