Daniel Straus BMO Long Federal Bond Index ZFL-T PAST TOP PICK Apr 05, 2024

Bonds offer a nice diversification against a recession or slowdown in economic growth. ZFL pays a 3.6% yield, so it offers investors a solid yield while central banks determine their final monetary policy decisions. Largely, we think that we are near the end of the hiking cycle, inflation is coming down, it is near the target rate of 2%, and while the consumer is resilient, a tightened credit market can lead to negative outcomes occurring eventually, and bonds are essentially insurance against this. It's possible that the BoC increases rates two or more times by the end of the year, however, if inflation slows faster than expected, these goal posts may change and thus bond prices can be buoyed. We would be comfortable holding bonds here as insurance, however, we would prefer to wait until Canada's next inflation reading as well as the BoC decision to add to the position.
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The largest ETF giving you exposure to purely CAD long bonds. Same theme as the TLT.

Canadian federals, a growing category. Good way to add in alongside cash and take on some duration-risk exposure. Barbells in a bit of rate risk in a capital-efficient way. One of the few asset classes in a portfolio that would zig should the market zag into a recession.

When you buy any bond fund or ETF, you have persistent rate risk. Very different from buying a bond that matures. If you want to take advantage of falling yields, you have to own long-term bonds that don't mature for a long, long time. So if interest rates fall, you get the advantage of that.

For a bet on falling interest rates, long bonds are the way to do it. ZFL contains long-term federal government bonds in Canada. In the US, use TLT. Best bang for your buck, but highly volatile and highly risky. Long bonds right now are facing a tremendous wall of supply, and he's not sure they're going to fall that much in price. He's quite cautious on long bonds right now.

ZFL is Canadian long bonds. TLT is made up of Treasury long bonds. Both great vehicles in the context of trading and looking out for a recession. We're in a trading range for interest rates in general for the next few years. Bound on one end by colossal amounts of government debt, and on the other side inflation is driving rates higher as well. And all with the prospect of a slower global economy.

If you think there's going to be a harder economic landing, federal bonds will outperform provincial bonds as a rule of thumb. But you'll get a bit more yield in a provincial bond in the long run. 

Most recently he's been adding duration and maxing out long-bond exposure. After the markets rally a bit, he's trimming that back. He wouldn't say buy and hold. If you were to see the US 10-year get back to 4.75%, and the US long bond get back to 5%, those are great opportunities for longer-term trades.