Historically, the bond market has been a relatively safe place for investors to put their money. It was low risk and low reward, and offered a safety net in case the equity market took a tumble. However, as interest rates rise, prices of bonds are dropping. In the last few years, the bond market has experienced the largest selloff in history.

All bond and preferred share prices are inversely related to interest rates and yields. As interest rates rise, existing lower return fixed income instruments become less desirable, causing the price of that security to drop. The faster the interest rates rise, the faster the capital prices fall – a phenomenon that began in March of 2022. Today, an investor in the bond market can secure up to a 4-6% return on a low-risk basis. This makes certain sectors of the equity market a lot less attractive, particularly those with small dividend distributions. In order to compensate investors for the added risk, these equities would need to grow at a premium to make it worthwhile which is something that seems far from certain, at least in the short term.

With the “higher for longer” interest rate sentiment, the bond market will become more than a stabilizing tool. As the price of bonds continue to fall, we are buying bonds and preferred shares with higher returns at discount prices, giving us not only a decent annual ROR, but also the potential of capital gains. The current school of thought is that we are in the last inning of rate increases. Whatever fixed income we buy today is probably close to the best prices and yields we will see for this business cycle.

On our end, we have been taking advantage of these discount bond and preferred share prices to capitalize on this historical event. 

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IN CASE YOU MISSED IT: In addition to the City of Ottawa’s new requirement to declare your principal residence “occupied,” the federal government launched the Underused Housing Tax (UHT) on January 1, 2022. This will require certain owners of residential property or rental property to file an information return and potentially pay a 1% annual tax on the value of such property if the property is vacant or underused.  You may still be required to file the information return even if you are not required to pay the tax (eg., if the owner is a private corporation, trustees of a trust, and partners of a partnership). Legally, a partnership can exist if there are 2 or more people carrying on a business in common with a view to profit, which could include both spouses on title of rental property. This would subject both parties to the filing requirement. A failure to file the information return may result in penalties ($5,000 for individuals and $10,000 for corporations), even if no tax is owing. Please speak with your accountant if you have any questions or concerns. The filing deadline for the 2022 taxation year has been extended to April 30, 2024.

Best,

Livingston Wealth Management Group