Beutel Goodman’s 3 Key Questions on Fixed Income

25 October 2023

In this webinar, Derek Brown, Senior Vice President and Head of Fixed Income, joined Kathy Tausz, Vice President, Fixed Income to discuss the different factors affecting bond markets this year. In conversation with host Paul Hamilton, Vice President, Managed Assets, Derek and Kathy answered these 3 Key Questions:

1. High inflation and the reaction of central banks has been the primary driver of fixed income markets over the past two years. How concerned are you about inflation going forward?
2. The yield curve receives a lot of focus in the investment industry. How is the shape of the curve affecting your investment strategy?
3. The narrative of a “soft landing” has gained a lot of traction recently. In your opinion, how likely are we to avoid a recession and what does it means for valuations in fixed income markets?

This recording took place on October 19, 2023. The following transcript is edited for clarity.

Note: The information in this transcript and recording is not intended, and should not be relied upon, to provide legal, financial, accounting, tax, investment or other advice. This is not an invitation to purchase or trade any securities. Beutel, Goodman & Company Ltd. does not endorse or recommend any referenced securities.

Paul Hamilton: Hello. My name is Paul Hamilton. I’m Vice President of Managed Assets at Beutel Goodman. Thank you for joining us today. Personally, I’ve long been intrigued by the bond market because of its vast size and its importance to the financial ecosystem. According to the Securities Industry and Financial Markets Association (SIMFA), in 2022 the global fixed income market was approximately US$130 trillion in value, which is about 30% bigger than the global equity market at US$101 trillion. In addition, it’s within the bond market where the cost of borrowing is established for both individuals and corporations, and also the discount rate, which underpins the valuation for equities.

So, given its importance, we’re very pleased to be devoting this edition of our 3 Key Questions series to see what some of the most important issues are in our opinion regarding fixed income for investors.

We believe that bonds are more attractive now than they have been in over a decade, with the potential to provide diversification from equity risk. Today, I’ve got the pleasure of speaking with Derek Brown, Senior Vice President and Head of Fixed Income, along with Kathy Tausz, Vice President of Fixed Income. So, let’s just dive in with my first question and this first one is for Derek.

High inflation and the reaction of central banks has been the primary driver of fixed income markets over the past two years. How concerned are you about inflation going forward?

Derek Brown: Thanks, Paul. So, it’s going to be a traditional economist answer — it depends. And it really depends on your definition of concerned. So how concerned are we that inflation is going to go back up to levels we saw in 2022, which was roughly 8%? We’re not very concerned about that. That was some very unique factors that kind of happened at the time, mainly supply driven. Obviously, the Ukrainian invasion [created a] kind of an energy boost that drastically increased inflation, especially on a headline side. And then there were supply chain issues working through COVID. So, that was kind of temporary, supply-driven peak inflation. So, we’re not really concerned about that coming back. Where we are a little concerned, is that inflation is going to remain sticky. And what we mean by that is that it’s only really going to decline slowly because right now it’s mainly demand driven. So, this is consumers buying things, particularly in services. I think we’ve heard all the stories of over the summer of concert tickets, festivals and events really pushing consumer demand forward, and in retail sales, and ultimately, inflation.

So, this is really going to force central banks to hold interest rates in what they term restrictive territory. We see 5% in Canada and 5.5% in the United States. These are very high levels — levels we haven’t seen since prior to the Great Financial Crisis. These are quite restrictive for these economies because they have a lot of debt in them. So, central banks [are expected to] keep these rates up there for a long time — what’s been termed, as you’ve probably seen in the media, as “higher for longer”. So, the goal of what the central banks are trying to do, as you mentioned Paul, is really kind of set the cost of financing, raise the cost of money to a point where most projects or a lot of projects are no longer profitable. And so those type of investments, capex investments by corporations, expansions, new product lines, new factories, they tend to go away as the return on capital isn’t there for those companies. And what it also does from a borrowing perspective is that the cost of interest really starts to eat into the consumer budget.

The first month or six months of higher interest rates really doesn’t have a major impact. It’s accumulation of impact where slowly but surely the consumer has to stop spending as much. So once that happens, it lowers consumer demand. This ultimately creates slack in the economy and what happens then is the economy grows below its potential or its trend growth rate, which is roughly 2%. When you have this reduced investment, lower consumer demand ultimately leads to a higher unemployment rate. And so there’s a little bit of a feedback loop where you have this lower demand, then higher unemployment, and higher employment leads to lower demand. It’s a phenomenon where they say the unemployment rate moves down in an escalator, but it moves up in an elevator. So, it does go up relatively quickly. Specifically, when we get into an economic slowdown in general, the unemployment rate rises 1 to maybe 2% in an economic slowdown, depending on the magnitude, whether it’s a small recession, large recession, or just an economic slowdown avoiding recession. But we still get into a point where you see that 1, 2, potentially even 3% move higher in the unemployment rate.

Once you see that unemployment rate move higher, this is the slack the central banks are looking to get. This weakens demand enough to a point where it’s very difficult to push through price increases. Specifically, on the service side, if you think of it from restaurants, airline flights, new cars or clothing, it’s very difficult to have that increased price pressure. So, ultimately this brings the inflation back down to roughly the 2% target. It may not quite get there this cycle, because obviously it’s a unique cycle, but it will get closer and that should allow central banks to start cutting interest rates. But so far what we’ve seen is really the road from 8% inflation to 4% inflation. It’s been relatively painless at this point. We mostly saw that from supply-chain disinflation and goods’ prices falling. But to get from 4%, or roughly where we are at 3.5%–4.0% to the 2% target — that’s going to require that economic slack and that’s much more painful. And that slack again is really central bank code for higher unemployment. So, people will have to lose their jobs over the next twelve months for the central banks to reach their targets.

And this is really the reason why we’re keeping interest rates higher for longer. And if anyone wants to do a deeper dive into inflation and things like that, we have a piece on our website called: Putting in the Hard Yards on Inflation. So, feel free to check that out. I think from a fixed income perspective, what it means for investors is that we’ve obviously seen a dramatic move higher in interest rates. It’s been very painful, frankly, for most investors in the fixed income market. But there is a bright side, going forward, we’ve seen the coupons and the running yield on the generic bond funds or indices move up above 5%. At this point, you have that good high-running yield kind of as a cushion for fixed income and there is also enough room for yields to drop back to 3% or something along those lines. We don’t know if or when that will occur, but that’s kind of generally where rates have trafficked in the past. So, there is this room for interest rates to fall going forward, should inflation get back to the 2% target.

The Bank of Canada and the Fed both believe their neutral rate is somewhere around that 3% level. Markets are expecting it to be much higher this cycle, more like 4% or even a little bit higher than that. We tend to disagree with that. We think that the hikes are working their way through the system and they’re only really beginning to have an impact on demand. Every month about 2% of mortgages reset and that means every month a new higher interest rate and a new higher interest cost to consumers. And that’s really slowly starting to pull away on consumer demand. And we’re seeing it come through the data slowly, but it is coming through the economic data. And we think this will be more noticeable going forward in the next twelve months as we have the remaining pandemic fiscal spend and excess savings fade going forward. So, concerned? Yeah, mainly from an economic perspective; we don’t think inflation is going back up, but we do think there will be economic pain in the next twelve months to get down to that 2% target.

Paul Hamilton: Understood. I like how you’ve described how getting to 2% inflation is going to be the hardest yard. But you’ve also described the silver lining in this for fixed income investors, which is a reset to higher levels when it comes to yields. And what that means for the future, potentially. So, thank you for that.

Okay, the second question, and this one’s for Kathy.

The yield curve receives a lot of focus in the investment industry. How is the shape of the curve affecting your investment strategy?

Kathy Tausz: Thanks, Paul. It’s a really interesting discussion topic because the yield curve hasn’t been this inverted in over 40 years. And I think another reason why it’s getting so much attention is that inverted yield curves have preceded every single recession almost to date. So, it’s a really ominous sign indeed. But it’s not all doom and gloom for us because as fixed income investors, we really view the yield curve as a great tool, not only as a macroeconomic signal, but also it helps us construct efficient fixed income portfolios. So, the shape of the curve can really tell us, as Derek was saying, about the price of money. Yield curves tend to be upward sloping with the front end anchored at the policy rate. And the policy rate is set by the central bank as they can raise or lower the cost of money, raising the cost of money to create more restrictions and less lending, or lower the cost of money to enable more economic expansion. And so that front-end anchor moves over time. The back end of the yield curve is really interesting because it gives us a different set of signals. These are longer term signals.

It tells us what the expected longer term trend growth rate is of the economy and what the expectation is for longer term inflation expectations. And a way to think about this, a way to understand this, is that if growth prospects are very high, then borrowers are willing to borrow at a higher rate to fund those projects. But if growth prospects are very low, if interest rates are too high, then their projects are unprofitable and they would demand a lower interest rate. And then the same with lenders. So, if growth prospects are very high, they could either invest their money in bonds or elsewhere, and then that sets the rate a bit higher. So, we can really garner some insight into what the market thinks is that trend growth rate of an economy. So, what all this means is that the different parts of the yield curve, the front end or the long end, give us different signals. When the front end of the yield curve is moving higher, that tends to be bad for the economy. It means that central banks are restricting growth. But when the back end of the yield curve is moving higher, that’s actually pretty positive.

It means that growth expectations are higher and the economy tends to be booming during those times. So, what does the current shape of the curve tell us? Well, for me, Paul, an intuitive way to think about this is that the yield curve is the market’s expectations of the path of those policy rates. So right now, the policy rate is very high in the front end and it’s inverted — it’s downward sloping. What that tells us is that the market expects central banks to cut rates over time. And when does this happen? This typically happens, as Derek mentioned, when recessions are looming because people expect central banks to cut to ease monetary policy as the economy is in decline. It’s not a crystal ball — it’s not that the market knows what’s going to happen in twelve months. But what does happen is that expecting a recession tends to be a bit of a vicious cycle where if you expect a slowdown, you don’t expand projects, hiring slows, and then this sort of feeds into other areas of the economy and then people start to pull back and then it leads to that downward spiral.

Another thing that the inverted yield curve does is it hampers the lending channel of the economy, which is the banking system. And currently we have very high front-end rates and an inverted curve. The traditional bank model of borrow short, lend long doesn’t really work well in an inverted yield curve environment. What’s happening is that banks are facing increased competition to attract and maintain deposits. If they can’t attract and maintain those deposits, they’ll end up lending less and become less profitable. So, without access to credit, then main street can’t expand, they can’t expand projects and the economy slows. So, that’s definitely something we’re watching out for, especially in the wake of the U.S. regional banking crisis that we faced in Q1 this year. So, just getting back to your original question — how does the shape of the curve affect our investment strategy? We apply what we know about the yield curve in a number of key ways. One of the big ways we look at it is we look at it as a macroeconomic signal. So, the inverted curve right now confirms that we’re likely near the end of the hiking cycle and likely in an early contraction phase of the economic cycle.

However, we are mindful that the economy is still showing a lot of resilience and a lot of strong jobs numbers, especially in the U.S. And it can stay inverted, and the yield curve can stay inverted for a very long time. For example, before the Great Financial Crisis, it was inverted for over 18 months, and we’re just twelve months into this inversion. So, it’s important to keep that in mind. Another really important thing for us to look at the yield curve as a macro signal is that it’s not actually the inversion that’s the true sort of doom and gloom signal — it’s the re-steepening after the inversion that’s the true recession signal, and we’re really watching out for that. So, what it means for our portfolio positioning is that we feel that we’re in this early contraction phase of the business cycle, so we’re favoring more liquidity in corporate bonds. We have a long duration bias because typically in slowdowns, as central banks cut their interest rates, it leads all yields to rally. And then a third nuance of the yield curve positioning is it helps us understand what term of bonds we want to invest in.

So, if we understand how the yield curve moves, we can pick whether we want to be in shorter term, medium term, or longer term bonds. If we expect that the central bank will cut interest rates as we head into a recession and we expect yields to fall, maybe we should be in longer term bonds. But what happens if the back end of the curve doesn’t move and just the front end of the curve steepens? You’re not going to get a lot of price appreciation in those long-term bonds. So, would it be then better to be in front-end bonds? Those will have a great yield move. The yield will fall by a lot, but they don’t have a lot of duration torque. What that means with bond math is you’re not going to get a high rate of return. We find that the sweet spot tends to be in the middle maturities of the yield curve. So that is the 5–10-year area — that’s the best combination of having enough duration torque and yield compression to create an attractive rate of return. So, that’s really a key factor in our portfolio positioning. We find the yield curve is so fascinating at every point in the cycle. It’s a great tool for us to understand the macro environment and it really helps us as active investors to create efficient portfolio positioning.

Paul Hamilton: Thank you, Kathy. I took a couple of things from that. What you said in terms of the potential for its predictive powers, where we’re heading economically. But also it’s important that as an active professional fixed income manager, it’s not just enough to have a view on the directionality of interest rates, you’ve got to know and have a view in terms of where that curve is going to go, and how to optimize your portfolio along those yield curve points. Because the curve doesn’t move in parallel fashion, typically. So, there’s quite an art and a science to management of fixed income.

Kathy Tausz: Yeah, it’s really fascinating. And if anyone wants to dive even deeper into the yield curve, we encourage people to check out our latest insights piece called Trouble with the Curve. It does a deep dive into the intricacies [of the yield curve] and what’s been happening the last two months.

Paul Hamilton: Okay. Thanks, Kathy. Well, let’s get to our third question, and this one, I’m going to go back to Derek for number three. And the question is…

The narrative of a “soft landing” has gained a lot of traction recently. In your opinion, how likely are we to avoid a recession and what does it means for valuations in fixed income markets?

Derek Brown: Thanks, Paul. You give me all the easy ones. No, I’m just kidding. So, this question is actually very much linked with the first question you asked me. First, I think we have to define what a soft landing is. I think we hear about it all the time, and it sounds like a good thing. It generally is. But the concept of a soft landing is really, as you mentioned, a huge market narrative over the last maybe two, three months. And so, this concept is effectively when the economy grows below potential, so below your 2% level, somewhere around zero to 1%. So, you don’t hit a recession; you kind of bounce around just above a recession. You do that for 12, maybe 18 months, potentially 24, but normally 12 to 18 months. And then during that time where you’re growing below potential — below 2% — the economy is creating a little bit of slack. Not a lot, but a little bit. And that’s kind of forcing, slowly but surely, inflation to fall back to 2%. Once you get back to that 2% level, this allows the central banks, the Bank of Canada, the U.S. Federal Reserve, to start cutting back towards their neutral level, which as I mentioned before, is roughly 3% — they would argue 2.5% to 3%.

We think it’s maybe a bit higher. Then they cut it back. So, you don’t get a recession; you don’t get significant job losses. And all in the package of roughly 12 to 18 months, inflation is close to 2%, and the economy bounces around zero [growth] and then starts reaccelerating in the future. It’s the Goldilocks scenario, and it’s something that we should always strive for. Nobody wants to create job losses. Nobody wants the economy to go into recession. So, without question, this is what the central bank should be shooting for. And I think we have to acknowledge that in this cycle, the possibility of a soft lending, it’s improved significantly in the last few months. We’ve seen a lot of resilience in the United States, specifically in retail spending, consumer stuff. But even with this improvement in the odds [of a soft landing], I’ll say it’s still not our base case. And the reason for that is that there’s been a series of shocks over the past few years, whether it was pandemic, the stimulus we’ve seen from governments, or the Ukrainian war, and obviously there’s been things happening throughout 2022 and 2023 as well. So, this has really changed economic data from a seasonally adjustment perspective, where we shut the economy down and then reopened back up again.

It creates these huge moves in economic data and that kind of reverberates for a few years when you think of it, statistically speaking. And it’s also kind of changed consumer behavior: we’re doing a Zoom meeting now, and tomorrow we’ll be working from home and people order different types of food online. And it’s just really changed consumer behavior and it shifted it a little bit more towards services and away from goods. But for the first two years of the pandemic, it was all goods. And so we went through an inflation bubble on goods at that point and then moved now recently into services. So, it’s been really difficult to navigate this cycle, a little bit more than most, because of these unique factors that seem to keep happening. Almost every six months there’s something happening. As Kathy just mentioned, there were bank bankruptcies back in March. We’re only six months past that. So, there seems to be these rolling unique factors that have made this cycle a little bit different than most. So, it hasn’t been particularly easy. But we do think that even with this consumer behavior shift and economic data that’s kind of been chunky and volatile, we still think of the longer term trend, and the underlying trend is that interest rates do have an impact and it’s an accumulation effect.

So that first $400 extra you have to pay on your mortgage on a monthly level. It’s not ideal; it’s not fun; it hurts, but it doesn’t hurt as much as six months later, twelve months later, eighteen months later. In addition to that, every month, as I mentioned before, 2% of mortgages are resetting. So, every month you’re getting people who are kind of clicking into that higher payment cost. We’ve had roughly 20% of mortgages roll over in the past year, and we’re going to see another 25% in the next year. And every year that goes by, and every month that goes by, more and more consumers are facing this increased cost. So, we do think eventually this will have an impact on demand. I think we also have to think back and realize what’s been happening. In the pandemic there was a lot of fiscal stimulus and I think the vast majority of that was warranted. Post pandemic, so 2021, 2022, we’ve still seen similar levels of excess fiscal stimulus from all governments. I don’t want to choose a stripe. It’s from a variety of countries, and from a variety of governments. And they’ve really had a hard time moving away from this fiscal largesse that we’ve seen over the last few years. Doing it at a time of high inflation, the highest inflation probably in 40 years, and historically low unemployment rates — this is not the time to be having fiscal deficits. And again, it’s a global effect. And it’s really because governments take a long time to shift off a narrative or something that was working. And now they’re starting to finally see that pushback. In addition to that, the Canadian economy specifically has really benefited from a big wave of immigration over the past year or so. And so while that’s fantastic for the economy, it’s good for society, that does temporarily boost economic growth. And it’s not to say that immigration will fall next year per se, but what’s happened is we’ve worked through a backlog of non-permanent residents, specifically foreign students. So, the Canadian economy has had about roughly 600,000 to 650,000 foreign students, non-permanent residents, come in over the last twelve months and this is a dramatic shift higher, generally 250,000 to 300,000 on top of an increased immigration target from 400,000 to 500,000.

Now the target is staying the same on an immigration level at 500,000, but we’re going to normalize from a non-permanent resident perspective. And so this boost we saw through most of 2023, because generally it’s that September to September effect as students come for the school year, that’s starting to fade right now in Canada, and we’re starting to see it in the data. So, I think that’s something we have to remember. The main issue we have with the soft landing [narrative] is that you’re running to a point that the thing that pulls down inflation — higher interest rates — will remain; however, the things propelling it, fiscal stimulus and immigration, are fading. And also that painless disinflation that I mentioned before, where things just kind of came back as supply chains unclogged — that’s going away. So now we’re going to face painful disinflation. That’s the 4% to 2% that’s going to create slack.

As I mentioned before, the unemployment rate takes an elevator up. So, as we create this slack, it’s unlikely that it’s just slowly going to go up; it’s generally going to go up drastically higher. And so that’s where we really kind of struggle with the view that soft landing is a base case. We think it’s not going to happen, and we think the next leg lower is going to require that slack. And so we have to ask ourselves, is it possible for central banks to create that slack to get to 2% inflation without the unemployment rate going drastically higher? And we just think it’s unlikely that they won’t be able to cause a recession and get the unemployment rate higher. I mean, at the same time, it is a unique cycle. So, it is possible, and I think we have to really keep our minds open to that, that this isn’t a fait accompli that we’re going to see a recession or an economic slowdown, but the odds are kind of stacked against the soft landing. And so we don’t think that’s our base case.

When we look at our fixed income portfolios and say, what does it mean for fixed income valuations? It really comes down to the higher for longer narrative that has really pushed dramatically higher interest rates. I think we all see that now. We’re roughly at 5% in a bond fund, and that’s due to the fact that the market is pricing much higher neutral rates than we’ve seen historically. So central banks think roughly 2.5%, maybe 3%, and the market is pricing in closer to 4%. And so from a valuation perspective, we think that most bond market participants are going to have to increase the number of cuts that we see when it comes to their next rate-cutting cycle. We believe that when the unemployment rate moves higher, the soft-landing narrative fades. And ultimately this causes credit spreads to widen. Similar to more recent risk-off environments: in 2012, we had the European debt crisis; 2016, there was the shale crisis; 2018 was when the Fed over-hiked; or just recently in 2022. So, we think credit spreads will move wider in and around to that level.

We don’t foresee a Great Financial Crisis or even a 2020 COVID-type widening in credit spreads. From our perspective, we want to be defensively positioned in corporate bonds. We do think there’s some good attractive value, specifically in Canadian banks. At the front end of the curve, 2- and 3-year corporate bonds look quite attractive at this point from an all-yield perspective. So, we’ve upgraded our credit quality. We do think there is a widening coming over the next twelve months, but at the same time, we actually think this is going to be a really good opportunity to deploy credit risk into the portfolio. We don’t see a major default wave coming. We think that a lot of these companies will work themselves out. And ultimately this is kind of a mark-to-market situation where you get a temporary widening, maybe three to six months of spread widening. And so in the moment, getting ready for that, we’ve actually drastically increased the liquidity in our portfolio. And we’re looking to create this war chest of corporate bonds that we want to buy, and we expect to be deploying that again probably in the next six to twelve months as valuations improve.

Paul Hamilton: Okay, so to be cognizant of time here, a couple of other questions have come in that I want to address before the end of the webinar. And the first one, actually, it’s consistent with what you were just talking about there. It’s about the potential for spread widening in the future. And so the question that came through specifically was … what’s your opinion on high yield bonds in the portfolio?

Derek Brown: So long term, I think most portfolios should have an allocation to high yield. I mean, every client is unique. They have their own uses for fixed income, but generally speaking there’s a lot of attractive value in high yield. However, high yield needs to be actively monitored and actively positioned. It’s not one of those all-weather type investments. So, a generic investment-grade corporate bond is generally an all-weather type of investment. Of course, there’ll be mark-to-market risk, but there’s not really default risk. The problem with high yield, specifically when you get into the lower rungs of high yield, triple C’s is what they’re termed from a credit rating perspective, they have an average default rate of roughly 5% to 10%. The problem with that is that it’s 5% until it’s 50%, and every recession it kind of spikes up to a 40 to 50% default rate. So, if we are entering an economic slowdown at this point, triple C issuers, kind of the lowest rung, highest indebted issuers will really run into trouble. In our portfolios that allow for high yield, we’ve taken that limit down pretty drastically. We’re kind of on the lower end of our spectrum.

The issuers we currently hold are what we term crossover issuers. So that is a double B rating that is most likely going to be upgraded into investment grade over the next 12 to 18 months. So, we think it’s okay to own high yield right now through the cycle. But you’ll be very selective with the issuers that you own. You want to be minimizing that exposure. However, long term, as I’ve mentioned before, we think valuations will improve over the next six to twelve months. You want to be ready to deploy that capital into high yield because there’s going to be a little bit of a throw the baby out with the bathwater situation where a lot of really solid issuers are going to see their spreads widened drastically, and the default probability for those issuers will increase when it’s unwarranted. And there’s going to be some really attractive opportunities there. We saw that coming out of COVID with a lot of the airlines. I think at the time everyone thought, oh, there’s never going to be air travel again, and obviously that’s not the case. We’re at 102% air travel from 2019 levels, and these issuers were all marked down to high yield bonds, and now they’re all being marked up to investment grade.

So, there will be some interesting opportunities coming out of the next cycle, but it’s really got to be an active allocation, and one that right now that has to be a little bit more conservative.

Paul Hamilton: Okay, thank you. Well, I’ve got one other question here that’s come in, and I think that this is a topical question for sure, and it’s really, I would say, the elephant in the room, which is … the past two years have been very, very difficult for fixed income investors. What do you think has changed that make the prospects for bonds more attractive in the future.

Maybe I’ll hand that off to Kathy.

Kathy Tausz: Thanks Paul. It’s a great question because the last two years have been painful, even year to date if we look at bond returns. But we really view this as a very exciting time for bonds because if we look from now into the future there’s a lot of great tailwinds. So, yields have been reset higher, as Derek just mentioned in his answer about high yield. High yield is yielding around 8–9%, investment grade 5–6%. Those are great attractive yields for investors looking to use fixed income as savings vehicles for some future obligation or even looking at it as a part of a balanced portfolio. So, we think the yields being reset higher does give a really compelling case for fixed income. And the bond math also looks really attractive in a couple of different ways. So, yields and prices as we know have that inverse relationship. As yields rise, as they have prices fall and as yields fall, prices rise. If rates continue to rise and prices continue to fall, we now have a big yield cushion that’s going to provide that downside protection for your overall bond return.

That downside protection is very important. And then there’s another key area of bond math that is quite interesting — the higher yields are, the lower the duration of a bond is, which is effectively the interest rate risk of a bond. So higher yields have also reset the volatility of bonds lower as well. And finally, I think for us the most compelling reason for fixed income? It’s the macro backdrop. We’re reaching near the end of the hiking cycle. We think the Fed and the Bank of Canada are likely to pause and historically speaking, when this happens the market reacts to that slowing economy. The front-end price is in the rate cuts and it’s very positive for bond prices. And we’ve actually done some math crunch on some historical numbers on this, which is kind of interesting. We’ve looked at the twelve months prior to a pause and twelve months post a pause, and the bond returns in the post pause twelve-month period do look very attractive. For all these reasons, we think that bonds have a very attractive yield, downside protection, lower volatility, and the timing looks great to us as well.

Paul Hamilton: Well, just keeping an eye on the clock here, I just wanted to say thank you very much to Derek and to Kathy for speaking with us. So much great information was shared and really the last part that Kathy was explaining is consistent with what our main message was at the beginning, which is we do believe that bonds are more attractive now than they’ve been for over a decade, along with the potential for diversification from equity risk.

So, in the interest of time, there are a few questions received and we’re not going to be able to get to all of them today, unfortunately. However, if you’d like to send your question over to your Beutel Goodman representative, they will follow up with you directly.

You can also visit our website at www.beutelgoodman.com and there you can find our regular insight articles, white papers, as well as previous webinars covering a diverse range of investment themes.

In fact, we’ll be hosting our next webinar on November 7 at 2:00 p.m. Eastern Standard Time. And that will feature Butel Goodman’s Managing Director of U.S. and International Equities, Rui Cardoso and he will present “Making Tailwinds out of Headwinds — Excesses Abound”. Registration details to come soon. Thank you very much for listening in today and we bid you a good afternoon.

Beutel, Goodman & Company Ltd.

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