Government bonds aren’t the most attractive growth investment in the world, especially if you’re a younger, new investor who’s actually looking to stay well ahead of the rate of inflation. Undoubtedly, with the Bank of Canada lowering the bar on interest rates, questions linger as to whether government bonds have what it takes to appreciate (perhaps by a percentage point or two) from current levels as they look to regain some of the ground that had been lost way back at the end of 2021 and much of 2022.
Undoubtedly, the rate hikes cut into the bond funds and exchange-traded funds (ETFs) pretty hard. And while there’s really no telling if more such hikes are on the way (I would not rule it out, given food inflation and affordability is still a major problem), I still think that investors seeking a safe and steady yield above the 3% mark might wish to start giving a government bond-focused ETF a second look.
Of course, government bonds might be safer than the likes of a corporate bond ETF or a diversified one with a good mix of government and corporate debt. While the added basis points of yield might be worth it for some, I’d argue that investors looking to prepare for a bit of a rainy day might wish to be holders of a government bond fund.
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Government bonds are great places for risk-off investors to hide
At this juncture, iShares Core Canadian Government Bond Index ETF (TSX: XGB) stands out as intriguing for risk-off investors who are looking to revisit the risk-off portion of their portfolios. The yield isn’t huge, sitting at 3.1%, but, at the same time, it’s not awful, especially considering risk-free yields are in a rather unrewarding spot right now!
While it’s typically never a good idea to time a stock market crash or correction by rotating some of the proceeds from your stock portfolios into bonds, I do think that it could make sense to rotate from GICs and cash (especially given savings rates are far below the rate of inflation) and into the more-liquid government bond ETFs, especially if you’re looking to skew more cautiously with broad stock market valuations continuing to climb and various risk-on parts of the broad markets beginning to show a few signs of getting dented.
Either way, the bond ETFs don’t look all too bad, especially compared to five years ago, when prices were higher, and yields were lower. Of course, things have bottomed out for the broad basket of bonds in the past four years.
But gains have been hard to come by. At the very least, though, there’s that decent yield. In any case, the big question for investors is whether they have enough dry powder sitting on the sidelines. As always, bond ETFs are low-return, low-risk investments. And if inflation stays a problem, total returns from such funds aren’t even guaranteed to offer a real return (that’s a return after inflation is considered).
Bonds aren’t right for everyone, but the future might be brighter for the asset class
Though I’m not the biggest fan of bonds and bond funds for investors who aren’t closing in on retirement (at least a decade away from an expected retirement), I do think that government bonds are becoming quite interesting for those fearful that the AI revolution will cause mass job displacement as well as significant disinflation or even deflation.
Such a climate might entail further rate cuts, and bond ETFs might be a source of capital gains and yield over the next five to 10 years. The future is uncertain, but it’s important to be prepared for anything, including a market shock.
