BS: Fidelity’s Wolf Positions for Extended Bond Rally: Canada Credit
Fidelity Investments’ David Wolf is positioned for more gains from a Canadian bond rally that has taken Bay Street’s top economists by surprise.
The former adviser to Mark Carney at the Bank of Canada, who became co-manager of five Fidelity funds in March, says economic inertia will keep policy makers at the Bank of Canada and Federal Reserve sidelined for longer than prognosticators expect. Wolf, who helps oversee the C$7.9 billion ($6.9 billion) Fidelity Canadian Asset Allocation Fund with Geoff Stein, said he’s resisted the flight from bonds that many fund managers have taken to guard against higher rates.
“We have tended to be pretty close to neutral duration, so having full compliments of fixed income, both Canada and the U.S., in our funds, which has certainly been helpful through this rally,” Wolf said at a panel discussion at Bloomberg’s Toronto office yesterday.
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The 38-year-old Wolf left the Bank of Canada in 2013. There, he was tasked with shepherding Carney’s quarterly monetary policy reports, which consistently warned that higher rates would become appropriate, a phrase that his successor Stephen Poloz has since eliminated from his reports.
The right moment for the Bank of Canada and the Federal Reserve is farther away than market indicators suggest, setting the scene for a longer bond rally, Wolf said. Stagnant wages, weak inflation and global growth concerns will make it harder for policy makers to raise borrowing costs, he said.
Yields Falling
“Most folks have wanted to be short duration, expecting interest rates to go up, if not immediately, at least on the visible horizon,” Wolf said. “Our view has been that may happen someday but it’s probably going to take longer than you think. In the meantime you get paid handsomely to wait.”
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Canada’s 10-year bond yield has dropped to 1.87 percent from 2.76 percent at the start of the year. That’s defied predictions of a 3.3 percent yield for the fourth quarter of 2014, according to the median estimate in a Bloomberg survey taken in January. Canadian bonds have outperformed Group of Seven bond markets this year, gaining 8.3 percent, according to Bank of America’s Canada Broad Market Index. On average, developed nation bond peers gained 6.7 percent. Canada’s benchmark equity gauge has returned less than 4 percent.
“As of a year ago, 100 percent of people thought interest rates would be going up,” Wolf said. “It’s often the case that when a 100 percent of people think something’s going to happen, something else is going to happen. And most of those something elses were better for bonds.”
Skipping Gym
Fidelity’s Canadian Asset Allocation Fund’s return of 8 percent this year puts it ahead of 83 percent of its peers in the Canadian balanced category, according to Morningstar Inc.
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The decisions by Fed Chair Janet Yellen and her Canadian counterpart Stephen Poloz to raise policy rates for the first time in the aftermath of the 2009 financial crisis will be guided by economics as well as behavior, Wolf said.
Poloz will raise rates in the fourth quarter of next year, according to a Bloomberg economist survey. The Fed is forecast to raise rates as early as March, based on trading in the futures market.
Still, policy makers can be gripped by procrastination, similar to busy people breaking a promise to exercise after work, Wolf said
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“Projecting you’re going to raise rates six months from now, nine months from now, 12 months now is a very different thing than actually sitting there and doing it,” he said. “It’s like waking up in the morning and saying you’re going to go to the gym after work, and actually going to the gym after work. I know I have this problem.”
Postwar Pause
The Bank of Canada has kept its policy interest rate at 1 percent since September 2010, the longest pause since the six-year hiatus that began in 1944, when low borrowing costs helped stoke a post-war economic revival. The U.S. Federal Reserve’s target rate for overnight loans between banks has been in a range of zero to 0.25 percent since December 2008.
“Given how fragile the economy is, how skittish financial markets, I would bet it will simply be harder for Janet Yellen and the crew to actually pull the trigger and raise rates at this stage,” Wolf said.
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Wolf reiterated a forecast for the Canadian dollar to drop to 80 U.S. cents or less as a condition for exporters to become competitive. The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, has dropped 7.4 percent against its U.S. peer this year to C$1.1469. One Canadian dollar buys 87.23 U.S. cents.
“To restore competitiveness, to rotate the economy towards being able to export, to build the capacity necessary to export, you need an undervalued Canadian dollar and you need it for quite some time,” he said. “I don’t what that level is but it’s probably pretty far south from where we are now.”
Wolf’s view stands in contrast for a currency no weaker than C$1.17, or 83 cents, next year, according to the average of analysts’ forecasts compiled by Bloomberg.
For Related News and Information: Poloz’s Low-Rate Riff Echoes Jukebox as Canada Rebuilt: Economy Carney Protege at Fidelity Sees 12% Loonie Slide: Canada Credit Bond Bears Hedge Calls by Cutting Yield Forecasts: Canada Credit
To contact the reporter on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net
To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net David Scanlan, Jacqueline Thorpe
