Bond yields are disappearing, says a Segal Advisors’ ‘Research Note.’ It says this is a concern for investors because yield provides the majority of the long-term total return for a fixed income investment. At approximately two per cent, the yield on the 10-Year Government of Canada Benchmark Bond is at the lowest level since 1982. Moreover, the yield on most high-quality bonds is now below the current rate of inflation. Negative real interest rates (the yield on bonds net of inflation) means the interest income is not sufficient to offset the erosion of purchasing power from inflation. It is tantamount to sacrificing a portion of principal at redemption in return for safety. Investors need to consider the portfolio implications, given the Bank of Canada’s intention to maintain short-term rates at one per cent in light of the bank’s modest growth projections over the next two years.
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