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It’s time to move target maturity bonds into other strategies

June 23, 2025 9 min 28 sec
Featuring
Pablo Martinez
From
CIBC Asset Management
iStockphoto/ismagilov
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Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Pablo Martinez, portfolio manager, CIBC Asset Management 

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To provide an update on the target date maturity funds that were launched about a year and a half ago, what we can say first is that those new funds performed greatly and performed as expected. Clients were able to profit from higher yields from corporate issuers, and also from the capital gains that are derived from purchasing bonds at a discount. 

Clients must understand that those funds were created to profit from a specific opportunity, which arose from an increase in bond yields in 2022, and a favourable fiscal treatment of capital gains. The window of opportunity is still good for those funds but as rates remain relatively stable, discount bonds become scarce as they come to maturity. Clients should have a contingency plan to move funds when the favourable context is no longer there. 

We are in 2025, and the 2025 sleeve of target maturity fund will be closing at the end of November. The fund itself will close and money will be sent back to our clients. We have to understand that most of the capital gains from the discount bonds have already been realized. The bonds in the portfolio now are all trading very close to par. So it would be a good time to deploy the funds into other strategies, whether it is in the longer sleeves of the fund — so we have sleeves in 2026, 2027, 2028, up 2030 — that is one opportunity that’s still there. Those funds are still trading at a discount, and provide a good GIC-equivalent yield. But again, there’s other strategies that we can provide, one of which is in fixed-income pools. And those provide greater diversity in asset classes or in geographical region, and a longer term approach. And also we have, obviously, the good old corporate bond funds, which provide a higher yield, great diversifier as well, and also goes longer into the yield curve and provides a bit more yield. 

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The performance for those funds will vary depending on the manager, and also the sectors that are being taken. In our case — in the case of the funds that we manage — what we look at is not just the name of the issue or the sector of the issue. The prime decision that we take will be on the GIC-equivalent yield. We derive that yield basically with two things: first will be the overall yield of the portfolio, but also the discount of the bond. 

So when we combine both, that’s how we get the best GIC-equivalent yield for the portfolio, and that, we believe, is what distinguishes us from the competition. It’s our capacity to source bonds that are trading at a discount, and also being able to buy them at the best possible price because of competition. 

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The later sleeve of the funds provide, obviously, the greatest yield on a GIC-equivalent basis. And it’s quite interesting to see that for each year we have a different set of bonds, some of which offer better yield and a better discount than others. 

For example, when we look at the sleeve for the five years that we have available right now — 2028 and 2030 — that’s where we have the best combination of higher yielding bonds that are trading at a discount. Unfortunately, it depends when those bonds were issued. So the years 2027, 2029 still provide good opportunities, but there’s less of a good combination of both and that’s why we’re seeing a lot of the funds go into the ’28 and ’30 sleeves of the funds. 

2026 is very popular, but what we’re seeing in 2026 is that this fund is being used maybe to provide an alternative to money market instruments, as it provides a higher yield, and those funds obviously are very liquid. 

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If I can provide an update on the fixed-income market, off the bat what we can say is that global bond yields have been very volatile since the beginning of the year. They’ve reacted strongly to the initial volley of decrees from the White House, and also to the daily tweets from the President. 

But we believe that the big break higher in yields came on what is being called now Liberation Day. On the day that President Trump announced that they were actually going along with imposing tariffs on main trading partners, we have seen rates increase quite materially and quite quickly, mostly on the back of inflation fears. You know, if U.S. imposes tariffs, it leads to higher prices for consumers. 

So already inflation was at the higher end of the central bank’s tolerance band. When you add to this tariffs, well, obviously you’ll get an inflation scare. Add to that the fact that the U.S. budget doesn’t really show any kind of fiscal constraint, and also that the DOGE initiative is not really having the desired impact on reducing government spending, well, you have the perfect recipe for higher yields. 

That being said, the yields moved up, but they remained within our trading range. The reason for this is that the break higher in yield was limited by fears of economic slowdown that would result from lower international trade. So the bond market is seesawing between those two themes: tariffs-induced inflation and slower growth. 

On the corporate bond side, corporate bonds did suffer at the announcement of tariffs, along with other riskier asset classes. But all the lost ground has been recovered as the White House is walking back their aggressive stance initially taken on tariffs. As tariff uncertainty remains in the market, it leads to a very volatile bond market that doesn’t really trade on economic fundamentals, but a lot of it on headline news. 

So our base case scenario still remains that tariffs will be imposed on trading partners. But nobody really knows the magnitude of the tariffs, and which industries and countries will be impacted. So right now, the market is undecided on which will impact rates the most. Will it be the inflation impact of tariffs, or the growth slowdown that might result from lower global trade? 

The positive spin here is that markets now react much less to the headlines, as it did earlier in Trump’s mandate, as participants realize that we have to set aside the daily reality show from the White House, and concentrate on what is the ultimate goal of this administration, which basically is increasing revenues from tariffs to finance a low tax base to corporations and consumers, and also to try to get the deficit in order. 

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How did the Bank’s June announcement impact fixed income? Well, actually, most of the Bank’s decision was already priced into the market. If we had looked at the futures market right before the announcement, that was priced at about 95%. And reading the comments and listening to what the Bank is saying, we can see that the Bank realizes that the confidence numbers from consumers and businesses are still very low. Most of the consumers and businesses remain very concerned about the trade war. 

So the Bank of Canada wants to make sure, even though confidence is low, they want to make sure that inflation remains contained before dropping rates. Because we have to remember, even though overall inflation is very well within the Bank’s tolerance rate, core measures of inflation remain above 3%, and they’ve been increasing slightly lately. So the Bank doesn’t want to repeat the same mistake it did in 2022, when they underestimated the inflation spike. 

The Bank still has ammunition to drop rates if need be, but they will use it only if necessary, as rates are not that much of a weapon in a trade war environment. Even if you drop the overnight rates, well, that won’t really boost confidence from consumers or businesses. It’s really fiscal measures that are a better tool, not monetary ones. 

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One key risk that we’re looking at, obviously, is the uncontrolled spending by the U.S. government. A lot of the reason why the Trump administration was put in the White House was to get the fiscal house in order. And in what we’re seeing now, it is not really happening. So when you combine uncontrolled spending by the U.S. government with the protectionist economic policy, well, there’s a risk that this would result in the loss of confidence in the Treasury market, and we’ve seen sign of this. 

And when you get a loss of confidence, that would normally lead to higher yields. Investors will require higher interest rates to invest in the U.S. Treasury market, and that would be very detrimental to U.S. growth, and also to the debt sustainability of the U.S. economy. That being said, a buyers strike for the Treasury market is not our base case scenario, but the risk of this happening has increased materially in the past few months. 

There still remains some places in the market where we can continue to find yield, and that for us is still in the corporate bond markets. So although corporate bonds underperformed early in the year with a drop in the equity markets, the rebound has been just spectacular so far this quarter. 

We believe there’s still good value in the corporate bond market, but we have to be aware that some sectors might be more at risk. Those sectors, of course, which are at the center of the current tariff negotiations, and the first one that comes to mind is car companies. So we have to be aware that the risk patterns have increased for some of the sectors, but the overall corporate bond markets remain a place where there’s still good opportunities.

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