Hank Cunningham

Bonds. A lot of things are going on in the bond space considering the action and inaction we have seen from Central Banks globally. The Fed looks like they are out on a limb all by themselves at the moment, and thinks they are done for the moment now, especially with the Bank of Japan’s last manoeuvre. He is in the camp where he feels the US economy is fine and bubbling along at about 3%. The consumer is in great shape, housing market is good and auto sales are good. The manufacturing side is suffering from the strong dollar, but the economy itself is in very good shape. This is a market of lows; low inflation, low commodity prices, low interest rates, and it is going to stay that way for a while. Thinks there is a real opportunity in the high yield market right now. The Cdn$ is undervalued by a good 10%-15%, so the US$ coming off the boil will help alleviate the downward pressure that we have seen. There is a lot of attractive risk/reward possibilities in the high-yield bond market. There are equity type returns available, in a market where the volatility is less than the stock market, and that deserves close scrutiny.

There is not much upside in a floating rate security in Canada right now. This is not a vehicle that is going to earn you very much return here.

Where to put $25,000 in an RRSP? This is a 1-10-year corporate ladder bond ETF iShares (CBH-T) that he would recommend. You’ll get a yield higher than a GIC. It has a really diverse portfolio of securities. (Also See Top Picks for XHY-T)

New Preferred shares? Thinks this is referring to one that was just issued that has an annual dividend rate of 5.5%. A nice new benchmark rate with about a 465 spread reset. This stabilizes the preferred market, and is one you can buy and hold.

April 9, 2019 bond with a rate of 3.95%. Unlikely you can sell this at a higher price than what it is at now, because it is rolling down the yield curve and getting close to maturity. These bonds are very liquid and you can sell them at any time, and then pick up another one that will mature in 2 or 3 years. He would not hold this bond to maturity.

Reset preferreds? Better off holding an old preferred reset for 4 or 5 years, ignoring its market price until interest rates rise, or Sell and take the loss and buy into one of the new preferred resets, with the minimum guarantee? What conditions would be required for the old resets to get back anywhere near their par value? There would have to be a substantial increase in 5 year Canada bond yields for that to happen, or a substantial increase in treasury bill yields. That is not going to happen this year. Anyone owning a preferred resets this year is going to be out of luck. Just hold on to these.

Have investment-grade corporate bond yields increased? Yes. There has been a lot of dislocation for credit markets, particularly in the 2^nd half of the year when the Government bonds outperformed corporate bonds substantially. With government yields rallying, it is natural for corporate spreads to widen, as the corporate bond market is not as liquid. There is also not as many market makers.

(A Top Pick Feb 11/15. Up 4.42%.) 4% bond maturing April 16, 2018. Brookfield is an undervalued investment. He likes the bonds very much.

(A Top Pick Feb 11/15. Up 0.94%.) Likes this because it is diversified, and you are not guessing where interest rates are going. He likes the 10 year laddered, because the average yield pickup from 6 to 10 years has been 100 basis points over the last 25 years.

(A Top Pick Feb 11/15. Down 10.5%.) This has been one of the worst years ever for the high-yield market. He has been in and out of this twice since his recommendation. This is nothing, but US high-yield bonds, and hedged back to the Cdn$. Well diversified both by maturity and credit. The yield to maturity is slightly under 9%.

Bank perpetual shares? These are like long-term bonds, very long duration with fixed dividend rates. If interest rates don’t go anywhere over time, then these shouldn’t go anywhere either. However, if a bear market in bonds develops, perpetual preferreds will hit the floor pretty fast. If interest rates in the next year go from 2% to 3%, that will put a big dent in the perpetual preferred market.

Regular GICs versus Market-linked GICs? Doesn’t think anybody should buy Market-linked GICs. The selling feature of a GIC is that you get your money back, and the negative return on the equity component. That is not necessarily the case. You don’t get the full return of the index that it is linked to, you don’t get the dividend income from it because they took it away to just buy futures with the money. You can do better yourself by buying a GIC and an ETF.

The average maturity of a corporate bond index would probably be 6-7 years. Doesn’t like the iShares product line, and prefers the laddered ETF’s to the street corporate bond ones. Nevertheless, corporate bond yields have widened out so far from government bonds, that he thinks there is going to be a very good compounding effect by owning corporate bonds from this point on, especially in the low inflation environment.

A good investment vehicle for an 89-year-old other than GICs? The only thing he would recommend would be Government of Canada treasury bills. They are the safest investment in Canada. Yield almost nothing, but you get your money back every 30 days if you buy a 30-day treasury bill. This is the ultimate in safety, liquidity and safety of principal.

Doesn’t like this very much. The convertible market in Canada is very low quality. It consists of nothing, but unrated, junior, subordinated debentures, issued by people who couldn’t borrow money any other way. There are very few decent industrial names in this, and a lot of them are energy names.