Mirador Corporation Real Advice Blog
High Interest Rates
When Will Interest Rates Decline?
February 15, 2024
I started as an investment advisor with RBC Dominion Securities in 1990. At the time it was not known, but this period was near the beginning of one of the largest and longest declines in rates and bond yields. I was lucky, RBC DS did not have a mentorship program, but one of the senior advisors took me under his wing. He was quite a bit older and more experienced and formerly held a senior position with the Royal Trust bond trading business. He was a very well-respected bond expert with many institutional clients. He was also classy, had a great sense of humour, and was a very wise man. So, under his guidance I started to make myself a bond and fixed income expert. I primarily built my business holding “Investing for Income” seminars in various Calgary public libraries throughout the 1990s. I taught pre-retirement and retired people how a portfolio of bonds, diversified – or “laddered” by maturity, had better yields, lower risk, and many other advantages over buying GICs at their bank.
Eventually I started teaching similar topics for the continuing education departments of the University of Calgary and Mount Royal and I was often approached for comments by the local media. Here the luckiest part – in the bond market, yields decline because bond prices increase. So, my clients had safe, no risk bonds with better yields than GICs and their bond portfolios were increasing in value quite well due to falling rates – without anyone losing sleep over the stock market. All this time I carefully followed the company research and studied the stock market, knowing that when things are too good to be true, things will eventually change.
During this marvelous bull market for bonds with rates and yields dropping, what happened with stocks? Well at first it was awful for stocks. But then as inflation came under control and the economy started to improve, things started to look better in the stock market. Financial companies, especially banks, had an incredibly good run. Also, commodity-oriented stocks like mines and minerals and oil and gas firms joined the party. As this evolved, I carefully had my clients gain some exposure to stocks, and the late 1990s provided us with wonderful overall results.
Of course, at any time in market history, there are a multitude of factors creating the outcomes, not just a single one like the rate declines I am discussing. That’s why history doesn’t repeat in the markets, markets are just too complicated. Additionally, the rate increases and ultimate high levels of the 1980s were far more dramatic than what we have seen over the last two years. And, the super-low rates we had before the recent rate increase were abnormally low and should not be expected to return. So, what about now, over 30 years and many cycles since I started at RBC DS?
When will Interest Rates Decline next? I am too caring and fair to tell you what I think is the answer. I don’t really know, and I know from experience that not many, if any, DO know. BUT, you don’t NEED to know when you are using a well designed portfolio management approach. Three decades of money management have taught me the futility of trying to make THE big macro-economic call or prediction. If you are correct, you can write a book and retire to the lucrative speaker’s circuit. If you are wrong, the damage to your clients’ wealth will take years to recover from. Instead, it is better to rely on wise portfolio diversification and data-based security selection.
With Mirador corporation, I have developed an investment process that does not requiring correctly predicting things like “When will rates start to decline?” The Mirador Triopay program has banks and financial companies with strong dividends and dividend growth within Triopay’s Equity Income allocation in case the next cycle is like the 1990s. The Triopay covered write program has commodity-oriented stocks in case commodities join the party like in the 1990s. Triopay owns utilities and other sectors to balance the diversification and risk. The Triopay preferred share program provides us positive exposure to the bond bull market if yields drop more. The Triopay market exposure allocation provides us exposure to the FANG stocks and Artificial Intelligence beneficiaries if the momentum in that field continues in the U.S. markets. All of these allocations are actively managed, optimized using relative strength and data modelling.
All the above securities have been selected to work as a cohesive, comprehensive, holistic portfolio using our proprietary quantitative models with the goals of security and income now. The Canadian Triopay started 2024 with a 7.5% yield. Due to price appreciation the yield has dropped but is still above 7%.
If rates decline, we are expecting continued gains from our holdings, providing total returns greater than the 7.5% distribution. If rates don’t behave the way we think or hope they will, the securities in Triopay will do little other than hold there own or decline slightly. In this scenario, 2024 for Triopay would be a year of simply collecting a tax-effective 7% or more, and that’s a good outcome for a conservative income portfolio in today’s investment environment. If there is a serious market decline, I have experienced that dividend stocks like the ones Triopay own have typically fallen around half of what the market indexes fall, and they tend to be able to maintain their dividend payments. Then, if we sell the market exposure securities and buy some inverse ETFs, our decline might even be less, leaving us in a better position for the next bull market.
The real advice is to find a way to invest that does not involve trying to answer impossible questions like “when will interest rates start to decline?” That’s what Triopay does. Cash in your pocket now, versus dreaming of future gains that may not happen.
The yield on the Government of Canada 10-year note started rising in August of 2020. It peaked recently in October of 2023. Inflation peaked in June of 2022 at a little over 8% and is now at 3.44%. Most central banks have not raised rates the last few months. It seems that we might have reached a possible inflection point.
Do you have a mortgage renewal on the horizon? Do you have questions about high interest rates and when they might drop? I would be pleased to provide you my unbiased, independent wealth advice for your unique personal situation. Feel free to call me at 403-608-4664. And if you know anyone that may find value in this post, please forward it to them.
Stan Clarke,
Investing for Income Believer