November 2015 Market Update: High yield, Interest rates
The month of November was steady for most markets as equities at home, south of the border and internationally, held their positions. Government bonds, investment grade corporate bonds and REITs in Canada also held their value. Contrarily US high yield bonds saw one of their biggest monthly declines falling 2.2% in November.
Canadian equity markets were flat as Canada started pulling out of its technical recession. Stats Canada reported Q3 GDP growing by 2.3% with growth coming from exports and household spending. US equity markets too remained flat mainly due to lower GDP growth, flat consumer spending and mixed data from housing sales.
Real estate continues to provide positive diversification for the portfolio. A recent analyst report favored North American residential apartment REITs as they are positioned to perform relatively well as occupancy remains high while rental rates continue to trend upwards.
The decline in the high yield market is a result of a selloff ahead of the US Federal Bank interest rate increase. We’ve observed this selloff in high yield debt accelerate in recent months, pushing their yields to the highest levels in about four years. We expect rising rates to reduce liquidity, as earnings on cash increase and push yields higher. However, the high level of yields means there is plenty of cushions to absorb an interest rate increase, making high yield a suitable component for a long-term investment portfolio especially combined with the recent price drop.
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