Experts say we might be in for a period in which inflation is structurally higher than it was over the past five to 10 years, which makes RRBs and TIPS a good investment even today
While those declines can be at least partially attributed to rising interest rates, Alexandra Gorewicz, senior investment portfolio manager at TD Asset Management in Toronto, says investors who believe inflation will be “stickier” over the long term now have an opportunity to add some inflation-linked exposure in a bond portfolio following this most recent correction.
Real yields on longer-dated RRBs are currently between 1.2 and 1.3 per cent. That means an investor who buys one and holds it to maturity will earn inflation over that period plus an extra return of roughly 125 basis points. For example, stripping out June’s big spike in gasoline prices brings the annualized increase in CPI down to roughly 6.5 per cent. And the current price of gasoline in the country is already much lower than it was last month.However, Mr. Boehmer says Canada remains above a threshold of inflation that is measured not only in terms of the rate of CPI increases, but also by the length of time the economy has been dealing with high inflation levels.
He adds Canada is in the process of leaving an “ultra-high” inflationary environment, but will likely settle at slightly higher inflation levels over the medium-term. PIMCO’s Mr. Seshasayee is pointing to the opposite, saying inflation-linked bonds make more sense “because you want inflation-hedging to be a part of your portfolio rather than some sort of market timing play.”
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