The Credit Suisse Group AG headquarters in Zurich, Switzerland, on Thursday, Aug. 31, 2023.
Bloomberg | Bloomberg | Getty Images
A group of Credit Suisse bondholders filed a lawsuit against the Swiss government, seeking full compensation over the contentious decision to write down the failed bank’s Additional Tier 1 (AT1) debt.
As part of Credit Suisse’s emergency sale to UBS last year, which was orchestrated by the Swiss government, Swiss regulator Finma wiped out roughly $17 billion of the bank’s AT1s, writing them down to to zero.
The bank’s common shareholders received payouts when the sale was completed.
The move angered bondholders and was seen to have upended the usual European hierarchy of restitution in the event of a bank failure under the post-financial crisis Basel III framework, which typically places AT1 bondholders above stock investors.
Law firm Quinn Emanuel Urquhart & Sullivan, which represents the plaintiffs, said Thursday that it had filed a lawsuit in the U.S. District Court for the Southern District of New York. It described Switzerland’s decision to write down the plaintiffs’ AT1 value to zero as “an unlawful encroachment on the property rights of the AT1 Bondholders.”
A spokesperson for the Swiss Finance Ministry declined to comment.
Finma previously defended its decision to instruct Credit Suisse to write down its AT1 bonds in March last year as a “viability event.”
“Through its actions, Switzerland needlessly wiped out $17 billion in AT1 instruments, unjustly violating the property rights of the holders of those instruments,” Dennis Hranitzky, partner and head of Quinn Emanuel’s Sovereign Litigation practice, said in a statement.
The face value of the AT1 bonds held by the plaintiffs in the suit was over $82 million, Reuters reported, citing the filing.
This photograph taken on March 24, 2023 in Geneva, shows a sign of Credit Suisse bank.
Fabrice Coffrini | AFP | Getty Images
AT1s are bank bonds that are considered a relatively risky form of junior debt. They date back to the aftermath of the 2008 global financial crisis, when regulators tried to shift risk away from taxpayers and increase the capital held by financial institutions to protect them against future crises.
One of the key attributes of AT1 bonds is that they are designed to absorb losses. This happens automatically when the capital ratio falls below the previously agreed threshold, and AT1s are converted into equity.
— CNBC’s Sophie Kiderlin contributed to this report.
The rate hold was largely anticipated by markets and economists. Many hoped it to be the central bank’s last hold before pivoting to a cutting cycle (lowering the rate, finally). Optimism around this has grown following February’s inflation report, in which the Consumer Price Index (CPI) clocked in at 2.8%, which is within one percentage point of the BoC’s 2% target.
However, the BoC itself seems less enthusiastic about this prospect.
The tone and language used in the announcement by the BoC’s Governing Council (the team of economists setting the direction for Canadian interest rates) clearly stated that inflation risks remain too high for comfort.
Why is the BoC holding its rate?
This is due to steep shelter and mortgage interest costs right now, which are the largest contributor to the CPI. However, the council did note that the core inflation metrics the BoC monitors (referred to as the median and trim) have improved slightly to 3%, with the three-month average moving lower. This is notable, and likely the clearest signal the central bank may be preparing to cut rates—but the BoC needs to see more of this trend before it’ll make a downward move.
Is inflation still too high in Canada?
“Based on the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet,” reads the BoC’s announcement. “While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained.”
The BoC also updated its inflation forecast, expecting it to remain at 3% during the first half of 2024, fall below 2.5% in the last six months of the year, and finally dip under the 2% target in 2025.
As this marks the BoC’s sixth consecutive hold, there hasn’t been a change to the prime rate since July 2023. That means the cost of borrowing has sat at a two-decade high for the last nine months—and that certainly has implications for all Canadians. Here’s how you may be impacted, whether you’re shopping for a mortgage, saving a nest egg, or making an investment decision.
How the Bank of Canada’s interest rate affects you
What the BoC’s rate hold means if you’re a mortgage borrower
First and foremost: If you’re a variable mortgage holder, you are the most directly impacted by the BoC’s rate direction out of everyone on this list. This is because the pricing for variable products is based on a “prime plus or minus” method. For example, if your variable rate is “prime minus 0.50%,” your variable rate today would be 6.7% (7.2% – 0.50%).
As a result of this most recent rate hold, today’s variable mortgage holders won’t see any change to their current mortgage payments; those with “adjustable” or “floating” rates will see the size of their monthly payments stay the same. Those with variable rates on a fixed payment schedule, meanwhile, won’t see any change to the amount of their payment that goes toward their principal loan. All variable-rate mortgage holders—and those with HELOCs, too—will continue to experience stability, though these Canadians may be frustrated that the BoC continues to be coy around future rate-cut timing.
Former U.S. President Donald Trump attends the Trump Organization civil fraud trial, in New York State Supreme Court in the Manhattan borough of New York City, October 25, 2023.
Jeenah Moon | Reuters
A judge ordered Donald Trump‘s company Thursday to inform a court-appointed financial watchdog about any efforts to obtain an appeal bond.
Judge Arthur Engoron’s order came three days after Trump’s lawyers in an appeals court filing said it has been “impossible” so far for the former president to get such a bond for a civil business fraud case he lost.
Trump sought the bond to prevent New York Attorney General Letitia James as early as Monday collecting on a $454 million civil fraud judgment against him as he appeals the verdict in Manhattan Supreme Court.
His lawyers have said that more than 30 surety companies rejected writing a bond for Trump because they would not accept real estate as collateral.
Trump has asked the appeals court to pause the judgment from taking effect without having to secure a bond. That court has yet to rule on his request.
In his order Thursday, Engoron told the Trump Organization it must tell its financial overseer, Barbara Jones, “in advance, of any efforts to secure surety bonds.”
Justice Arthur Engoron sits with his clerk as he presides over the civil fraud trial of former President Donald Trump and his children at New York State Supreme Court on November 13, 2023 in New York City.
Curtis Means | Getty Images
The company also must tell Jones about any claims the Trump Organization makes to obtain the bonds, any personal guarantees by Trump or other defendants, and any condition imposed on the company.
That level of disclosure would well exceed what Trump has disclosed about a $91.6 million appeal bond he recently received from a Chubb insurance subsidiary to secure a civil defamation judgment in favor of the writer E. Jean Carroll.
Jones, who is a retired federal judge, was appointed by Engoron as the financial monitor for the Trump Organization. The company has chafed under her oversight, complaining about her in filings with Engoron.
Engoron last month ruled that Jones would remain as the monitor for three years after finding that Trump, his two adult sons, his company and two executives were civilly liable for years of fraudulently inflating Trump’s asset values for financial gain.
The youngest of three and the daughter of Indian immigrants, Pier set her sights on Wall Street after graduating from Princeton University in 2003. She began her career at JPMorgan as a credit trader, a field that doesn’t have a lot of women.
“In the ladies room, I don’t bump into a lot of people,” said Pier, who moved from New York to California in 2013 to join Pimco.
Fortunately, she’s seen a lot of changes over the years. There has not only been some progress for women entering the financial business, but the culture has also changed since the financial crisis to become more inclusive, she said. Plus, it’s an industry where there is clear evidence of performance, she added.
“There’s accountability,” she said, in a recent interview. “Therefore, the gender role starts to break down a little bit. With responsibility and accountability and a number to your name, it’s very clear what your contributions are.”
Pier has risen through the ranks since joining Pimco and is now a portfolio manager within the firm’s multi-sector credit business. The 42-year-old mother of two credits mentors for helping her along the way, as well as her husband for supporting her and moving to California sight unseen. Her father also raised her to value education and hard work, Pier said.
“He was the quintessential example of the American dream,” she said. “Being able to see his hard work and a lot of progress meant that I never thought otherwise, that hard work wouldn’t lead to progress.”
Pier’s work has not gone unnoticed. Morningstar crowned her the winner of the 2021 U.S. Morningstar Award for Investing Excellence in the Rising Talent category.
“Pier’s cautious contrarianism and rising influence at one of the industry’s premier and most internally competitive fixed-income asset-management firms stands out,” Morningstar said at the time.
Pier is the lead manager on Pimco’s Diversified Income Fund, which was among the top performers in its class — ranking in the 13th percentile on a total return basis in 2023, according to Morningstar. It has a 30-day SEC yield of 5.91%, as of Jan. 31.
“We’re really broadly canvassing the global landscape, and then looking for where there’s the best opportunities,” Pier said. “It’s getting the interest rate sensitivity from investment grade, high-quality parts of EM [emerging markets], and the equity-like sensitivity from high yield and the low-quality parts of EM.”
The fund also invests in securitized assets, with about 23% of the portfolio is allocated to the sector, as of Jan. 31.
Pimco Income Diversified Fund
While the fund has a benchmark, the Bloomberg Global Credit Hedged USD Index, it is “benchmark aware” and doesn’t “hug it,” Pier said.
Morningstar has called the fund a “standout.”
“Pimco Diversified Income’s still ample staffing, deep analytical resources, and proven approach make it a top choice for higher-yielding credit exposure,” Morningstar senior analyst Mike Mulach wrote in January.
It hasn’t always been smooth sailing. The fund has more international holdings and a more credit-risk-heavy profile than its peers, which has sometimes “knocked the portfolio off course,” like it did in 2022 during the Russia-Ukraine conflict, Mulach said. Still, he likes it over the long term.
So far this year, the fund is relatively flat on a total return basis.
In addition to also leading PDIIX, Pier is also a manager on a number of other funds, including the PIMCO Multisector Bond Active ETF (PYLD), which was launched in June 2023. It currently has a 30-day SEC yield of 5.12%, as of Tuesday, and an adjusted expense ratio of 0.55%.
Multisector Bond Active Exchange-Traded Fund performance since its June 21, 2023 inception.
“It’s maximizing for yield, while looking for capital appreciation, and obviously, with the same Pimco principles of wanting to keep up on the upside, but manage that downside risk,” she said.
Right now, Pier prefers developed markets over emerging markets and the U.S. over Europe.
Within investment-grade corporate, she likes financials over non-financials. Credit spreads have widened in financials over the concerns about regional banks, she said.
“Maybe some of it’s warranted for the fact that they need to issue significant supply year after year, but we think that the metrics of, say, the big six … look quite resilient on a relative basis,” Pier said.
Within corporate credit, the team looks at the “full flexibility of the toolkit,” she noted. That could include derivatives and cash bonds, she added.
“Are we looking at the euro bond or the dollar bond in the same structure? The front end or the long end? Cash versus derivatives? However we can most efficiently express our view and trade that will lead to the best total return,” Pier said.
She also likes securitized assets, which she said can be a lot more resilient during a downturn. One of Pier’s preferences is the legacy non-agency mortgage-backed securities market.
“We have the data on how long they’ve been in the home, how much home equity has been built, what their mortgage rate is, what’s been their alacrity to pay, so we can see — is there any delinquency?” she said. “We have a lot of data there and a lot of comfort around that asset class.”
Agency mortgage-backed securities are also attractive and could be a good substitution for single-A rated corporate debt, she said.
About 60% of homeowners have a mortgage rate below 4%, according to a Redfin analysis of data from the Federal Housing Finance Agency’s National Mortgage Database.
“It’s more liquid, implicitly guaranteed by the government and it’s a pretty similar spread,” she said.
Pier finds the work exciting and encourages women to join her in the business.
“Anyone can excel who wants to really put in the work and wants to bet on themselves,” she said.
Republican presidential candidate, former U.S. President Donald Trump speaks during a Fox News town hall at the Greenville Convention Center on February 20, 2024 in Greenville, South Carolina.
The former president’s lawyers claim that he would face “irreparable” harm if required to fully secure his judgments in order to keep them from coming due, and might even have to quickly sell off properties that can’t be re-bought.
They also say Trump can’t simply post a cash deposit — at least not in his New York civil business fraud case, where he is facing $454 million in fines and interest alone.
“No one, including Jeff Bezos, Elon Musk and Donald Trump, has five hundred million laying around,” Trump’s attorney Chris Kise told an appeals court judge last week.
But legal experts say there’s another option that Trump’s lawyers haven’t mentioned in the court filings: Trump could offer up some of his properties as collateral to borrow what he needs — potentially from private equity sources.
There are “lots of private lenders out there in the debt markets and private equity markets that could lend” to Trump, said Columbia University law professor Eric Talley.
“In all cases, the loans would probably have to be secured with Trump properties, but if there is enough equity in some of them, he should be able to obtain secured credit, even on a compressed timeline,” Talley said.
In this courtroom sketch, former U.S. President Donald Trump looks on as his attorney Alina Habba delivers closing arguments during E. Jean Carroll’s second civil trial in which Carroll accused Trump of raping her decades ago, at Manhattan Federal Court in New York City on Jan. 26, 2024.
Jane Rosenberg | Reuters
The professor underscored the irony of Trump using his real estate to fight a lawsuit in which he was found liable for fraudulently inflating his property values for financial gain.
Any loans “would themselves involve making declarations of the value of the property — and that of course is what got him into this mess to begin with,” said Talley.
But accurately appraising the value of Trump’s assets is not a serious obstacle. As Trump’s lawyers noted during the fraud trial, the institutions that have lent him money already have conducted their own analyses of Trump’s finances, and did not rely solely on the claims at issue in his financial statements.
A more important factor could be whether Trump’s real estate assets are already mortgaged, said law professor John Coffee.
“He would have to come up with clean real estate property that is not already securing something that some other bank has a lien on,” Coffee said.
As of late January, the Trump Organization comprised 415 entities, according to a retired federal judge tasked with monitoring the company’s finances.
Of those, Jones identified 70 operating entities that generate revenue. That includes long term leases of buildings like 40 Wall Street, commercial office space on 13 floors of the 58 story Trump Tower, and the Trump National Doral Miami resort.
View leading into Trump National Doral in Miami, Florida on April 3, 2018.
Michele Eve Sandberg | AFP | Getty Images
In New York City, the value of Trump’s real estate holdings totals $690 million, according to a September 2023 estimate by Forbes. And some of the most prominent buildings that bear Trump’s name in the city are largely owned by other entities.
New York Attorney General Letitia James, who brought the fraud case, said she would seize Trump’s real estate assets if he cannot pay his civil penalty.
“There’s absolutely no reason for the New York attorney general to be kind and gentle to him if he doesn’t post the bond,” Coffee said.
Trump said in a deposition last year that he had “substantially in excess of $400 million in cash.” But his lawyers claimed last week that, if Trump is forced to secure the full $454 million penalty, “properties would likely need to be sold to raise capital under exigent circumstances.”
They instead offered to post a $100 million bond, but New York appeals court Judge Anil Singh rejected the proposal.
Unless a full appeals court reverses Singh’s decision, Trump has until March 25 to post an “undertaking” — cash or bonds — covering the entire penalty in order to stop it from taking effect during his appeal.
Trump has also asked a federal judge to delay another fast-approaching deadline to pay an $83.3 million penalty in E. Jean Carroll’s civil defamation case.
Carroll’s attorneys argued that Trump’s request “boils down to nothing more than ‘trust me.’”
If Trump does attempt to sell assets to meet his undertaking, he won’t have much time to get it done.
He would have to hire a broker to market his properties, and any deal would have to close in order to free up the cash to use toward a bond, said Neil Pedersen, owner of New York-based bond agency Pedersen & Sons.
“There could be opportunistic buyers approaching him as well,” Pedersen noted.
So far, Trump has given no indication that he is moving in that direction.
“There are no sales planned or contemplated,” Kise told CNBC in an email before Singh’s ruling. “So no appraisers hired, no steps taken, etc.”
Trump Tower on 5th Avenue is pictured in the Manhattan borough of New York City, New York, U.S., April 18, 2019.
Caitlin Ochs | Reuters
After Singh ordered Trump to pay the full penalty, Kise and Trump’s other attorneys did not reply to questions about whether they were now preparing to sell off properties.
Coffee said that Trump “can very likely” get a loan to help him meet his undertaking. That’s in part because Singh temporarily halted another penalty that would bar Trump from applying for loans from New York registered lenders.
Moreover, said Coffee, Trump is well known within New York financial circles, so he “not going into a market with strangers.”
“The real problem is, can he gives the banks enough collateral that they’re satisfied?”
Talley agreed. “There is a lot of ‘dry powder’ out there, not just with banks but also in non-banks,” he said.
17. 2011: Google released Google Wallet in the U.S., three years before Apple Pay even popped up on our iPhones. Over the next decade, Google tested many versions of the app—and even launched a second one, named Google Pay (which was intended to replace Google Wallet). In February 2024, the company said it would end Google Pay in the U.S.—and replace it with Google Wallet. In its current iteration, Google Wallet serves as a comprehensive digital wallet that can store payment and loyalty cards, transit and event tickets, proof of COVID vaccination and even digital car keys.
18. 2014: Scotiabank renamed ING Direct Canada, which it acquired two years earlier, as Tangerine. ING Direct was Canada’s first branchless bank and one of the first institutions to offer a no-fee high-interest savings account (HISA). Today, under its new name, Canada’s first online-only bank continues to offer favourable rates and low fees.
19. 2014: ShareOwner Investments was the first robo-advisor to operate in Canada—by a matter of months. At the start, the portfolio management platform allowed Canadian investors to pick one of five model portfolios or to create their own from a list of around 50 ETFs. Over the next few years, robo-advisors gained popularity among investors, as more startups cropped up, Wealthsimple acquired ShareOwner Investments, and BMO became the first major Canadian bank with its own robo service, SmartFolio.
20. 2015: Following devastating floods in Alberta, home insurance providers Aviva Canada, The Co-operators, RSA Canada and 13 others offered overland flood insurance, which never existed before. Previously, insurers generally only offered sewer backup coverage, which protects against another type of water damage.
Image by Freepik
21. 2016: BMO was the first bank to offer biometric identification for corporate credit card users. With this technology, customers could complete online payments with a “selfie” or fingerprint check. On the mobile banking side, a new version of the Tangerine app incorporated biometric technologies like EyeVerify (for eyeprint ID technology) and VocalPassword (for voice authentication).
22. 2017: Toronto-based PayBright was the first company to offer a buy now, pay later option to Canadians. The service, offered at online check-outs, allows shoppers to pay for routine purchases—everything from clothing and makeup to flights—through installments. Many similar companies now operate in Canada, including Affirm (which acquired PayBright in 2021), Sezzle and Afterpay. Some large banks have also created installment payment products and credit card features, including CIBC (with Pace It) and Scotiabank (with SelectPay).
23. 2019: RBC made NOMI Budgets available through the RBC mobile banking app. NOMI Budgets, which the bank described as the first of its kind in Canada, uses artificial intelligence (AI) to proactively analyze a customer’s spending history, make budget recommendations and send timely updates.
24. 2022: OpenAI released ChatGPT, a generative AI chatbot. Within two months, it had an estimated 100 million monthly active users, making it the fastest-growing consumer application in history. The new tech has myriad potential applications in finance, including performance measurement and forecasting, data analytics, customer service, and real-time calculations and advice.
Police took into custody more than 100 people protesting the Pennsylvania state government’s investments in Israel on Monday, shutting down a demonstration on the steps of the Capitol Rotunda in Harrisburg.
A spokesperson for the Department of General Services, which includes the Pennsylvania Capitol Police, said 126 people were taken into custody at what he described as an unpermitted, unauthorized demonstration. They were ordered to disperse before being arrested, issued citations for trespassing and then released, said spokesperson Troy Thompson.
The protestors, many wearing T-shirts that said “divest from genocide,” clapped and chanted during the protest, which organizers said was targeted at the state Treasury Department’s investment in Israel bonds.
One large sign said the state should reinvest that tax money in health care, housing, schools and climate. There were chants of “free Palestine” before and after they were arrested.
The event was organized by Jewish Voice for Peace, the Philly Palestine Coalition and the Pennsylvania Council on American-Islamic Relations. It began Monday morning outside the Capitol but moved to the Rotunda by early afternoon.
Lilah Saber, a participant in the protest, said it was solely focused on the state’s investment in Israel bonds.
“We did not plan on being arrested, but we were arrested,” Saber said.
Pennsylvania Treasurer Stacy Garrity, a Republican, said state treasurers of both parties have invested in Israel bonds for more than 30 years. The state’s share of Israel bonds rose by $20 million after the Hamas attack that began the war in Gaza and is currently $56 million, Garrity said in a statement released by her office.
The state also holds about $8 million in other Israel-based securities. Together with the $56 million, that amounts to about 0.14% of the funds the Treasury Department actively manages, Garrity said.
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In other words, during the near-zero interest rates that prevailed until recently, investors wanting real inflation-adjusted returns had almost no choice but to embrace stocks. (Read more about TINA and other investing acronyms).
GICs have a place in locking in some real-returns, especially if inflation tracks down further. But Raina says investing in bonds offer opportunities to lock in healthy coupon returns, with the prospect of higher capital appreciation opportunities if interest rates fall further, since bonds currently trade at a discount. The risk is the unknown: when interest rates will start falling. Based on what the Bank of Canada (BoC) announced in the fall, Raina feels that could be some time in 2024. (On Dec. 6, the BoC announced it was holding its target for the overnight rate at 5%, with the bank rate at 5.25% and deposit rate at 5%.)
CFA Anita Bruinsma, of Clarity Personal Finance, is more enthusiastic about GICs for retirees in Canada. “I love GICs right now,” she says. “It’s a great time to use GICs.” For clients who need a portion of their money within the next three years, she says, “GICs are the best place for that money as long as they know they won’t need the money before maturity.”
Other advisors may argue bond funds could have good returns in the coming years, if rates decline. However, “I would never make a bet either way,” Bruinsma says, “I think retirees looking for a balanced portfolio should still use bond ETFs and not entirely replace the bond component with GICs. However, I do think that allocating a portion of the bond slice to GICs would be a good idea, especially for more nervous/conservative people.” For Bruinsma’s clients with a medium-term time horizon, she recommends laddering GICs so they can be reinvested every year at whatever rates then prevail.
GICs vs HISAs
An alternative is the HISA ETFs. (HISA is the high-interest savings accounts Small referred to above). HISA ETFs are paying a slightly lower yield than GICs and also do not guarantee the yield. “I also like this product but GICs win for the ability to lock in the rate,” says Bruinsma.
When investing in a GIC may not make sense
Another consideration is that GICs are relatively illiquid if you lock in your money for three, four or five years or any other term. “If you are uncertain if you will need those funds in the near future, you can look at a high interest savings account ETF like Horizon’s CASH,” says Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “This ETF is currently yielding 5.40% gross—less a 0.11% MER.”
Apart from inflation, taxation is another reason for not being too overweight in GICs, especially in taxable portfolios. Even though GIC yields are now roughly similar to “bond-equivalent” dividend stocks (typically found in Canadian bank stocks, utilities and telcos), the latter are taxed less than interest income in non-registered accounts because of the dividend tax credit. In Ontario, dividend income is taxed at 39.34% versus 53.53% for interest income at the top rate in Ontario, according to Ardrey. This is why, personally, I still prefer locating GICs in TFSAs and registered retirement plans (RRSPs).
When GICs are right for retirees
Ardrey says GICs can be a valuable diversifier when it’s difficult to find strong returns in both the stock and bond markets. “This is especially true for income investors who would often have more of a focus on dividend stocks.” Using iShares ETFs as market proxies, Ardrey cites the return of XDV as -0.54% YTD and XBB is 1.52% year to date (YTD). “Beside those numbers a 5%-plus return looks very attractive.”
U.S. Treasury yields nudged slightly higher on Tuesday, as market participants await the release of key economic data points later in the week.
At 5:52 a.m. ET, the yield on the benchmark 10-year Treasury note was around 3 basis points higher at 4.128% while the yield on the 30-year Treasury bond was up around 2.9 basis points at 4.345%.
Yields move inversely to prices.
Investors are trying to gauge when the Federal Reserve will begin cutting interest rates, which will be a key determinant of the trajectory for markets and the economy this year.
Two significant pieces of economic data are on the slate this week: a preliminary fourth-quarter GDP growth figure is due on Thursday, followed by the Commerce Department’s closely-watched personal consumption expenditures price index for December on Friday.
Despite the uncertain rate outlook, risk-on sentiment remained robust on Monday, as the Dow Jones Industrial Average and the S&P 500 both notched all-time highs.
“It’s an economy proving to be more resilient than many thought and it’s one that is supported by the prospect of central banks cutting rates, and that’s a great environment for bonds and it’s a great environment for risky assets,” PGIM Principal and Global Investment Strategist Guillermo Felices told CNBC’s “Squawk Box Europe” on Tuesday.
With that in mind, here’s a key date to circle on your calendar: Dec. 31. That’s the deadline for making RESP contributions to maximize government RESP grants each year. The Canada Education Savings Grant (CESG) matches 20% of what you put in, up to a limit of $500 annually. To receive the full $500, your contributions must total at least $2,500 by the end of December. The lifetime CESG maximum per beneficiary (child) is $7,200, and you can only catch up one year at a time—so, you can see why that annual deadline merits attention. That’s especially true if you only have a few years to save before your child heads off to school.
Now is a great time to plan your contributions for this year. Here are some things to consider.
Despite its name, an RESP is much more than just a cash savings account. In fact, just holding cash in an RESP may not always be the best strategy, as inflation can erode its value over time. It’s worth looking into different ways to grow that money.
There’s no one-size-fits-all answer for the best RESP investment options. The right mix for your family will depend on several factors, including your financial circumstances, how much time you have, and how comfortable you are with risk. To help you make the most of your RESP, the Canada Revenue Agency (CRA) provides a list of “qualified investments” for this account, including the following:
Bonds: These can be either government-issued or corporate-issued. Bonds are generally seen as a safer investment compared to stocks, offering fixed interest payments over time.
Guaranteed investment certificates:GICs are issued by financial institutions, and you can choose terms such as one, two, three or five years. At the end of the term, you’ll receive a guaranteed amount of interest. Generally, you must wait until then to access your money.
Stocks: Investing in individual stocks can offer high returns, but they generally come with higher volatility than bonds and GICs. It’s essential to thoroughly research the companies you’re thinking about investing in—and remember, picking stocks can be risky!
Mutual funds: These funds can hold a mix of stocks, bonds and other assets. They offer diversification and are managed by financial professionals. Investors pay a percentage of the value of their investment towards annual management fees.
Exchange-traded funds: ETFs aresimilar to mutual funds in that they can hold a mix of assets like stocks and bonds. However, ETF shares trade on stock exchanges, just like individual stocks. Most ETFs are passively managed, but more active ETFs are coming onto the market.
ETFs are a fast-growing asset class in Canada. They offer investors numerous benefits, including:
Built-in diversification: ETFs may bundle various assets, providing wide exposure across different sectors, asset classes and geographies, which helps in reducing investment risk.
Professional management: With ETFs, a fund manager oversees the selection and rebalancing of holdings, often trying to replicate specific stock market indices (such as the S&P 500), thus reducing the complexity of managing individual stocks and bonds.
Flexible asset allocation: ETFs offer a spectrum of asset allocation options, so they may be suitable for investors with different risk tolerances and investment timelines.
Choosing the best ETF for your RESP largely depends on two variables: your time horizon (how long until your child needs the funds) and your risk tolerance (how much market fluctuation and potential losses you can comfortably handle).
To simplify this decision-making process, one option to consider is an all-in-one ETF, such as those offered by Fidelity. These ETFs offer different asset allocations and risk classifications. Fidelity’s All-in-One ETFs have the following target asset allocations and risk classifications (as at Oct. 31, 2023):
Fidelity All-in-One ETFs
Conservative
Balanced
Growth
Equity
Risk classification
Low to medium
Low to medium
Medium
Medium
Ticker
FCNS
FBAL
FGRO
FEQT
Equity
40%
59%
82%
97%
Fixed income
59%
39%
15%
0%
Crypto
1%
2%
3%
3%
Source: Fidelity Investments Canada ULC
Fidelity’s suite of All-in-One ETFs offers strategic diversification, with most of them giving you exposure to global bonds and stocks from all market sectors. Interestingly, they even include a small exposure to cryptocurrency (1% to 3% depending on the fund), adding a modern twist to traditional investment portfolios. (Read more about crypto in Fidelity ETFs.)
The traditional portfolio of stocks and bonds has been on a tear over the past two months as the S&P 500 nears a record high, but it’s the big gains in fixed income that stand out, according to Bespoke Investment Group.
Fixed-income assets are typically the “insurance” part of the classic 60-40 portfolio, usually holding up during market weakness even if that wasn’t the case in 2022, Bespoke said in a note emailed Thursday. Both stocks and bonds in the U.S. have rallied during the fourth quarter and are up so far in 2023.
“With just two trading days left in the year, the market is on the verge of history,” Bespoke said. “After being written off for dead in the last year, the traditional 60/40 portfolio of 60% stocks and 40% bonds is within a whisker of its best two-month rally since at least 1990.”
In 2022, bonds failed to provide a cushion in the 60-40 portfolio as the Federal Reserve aggressively raised interest rates to battle surging inflation. Stocks and bonds tanked last year, with the S&P 500 SPX
seeing its ugliest annual performance since 2008, when the global financial crisis was wreaking havoc in markets.
Over the past two months, the classic 60-40 mix has seen a gain of 12.16% based on the total returns of the S&P 500 and Bloomberg Aggregate Bond Index, according to Bespoke. The current rolling two-month performance is stronger than gains seen in the two-month rally after the onset of the Covid-19 pandemic through May 2020, the firm found.
BESPOKE INVESTMENT GROUP NOTE EMAILED DEC. 28, 2023
“The only other period that was better for the strategy was the two months ending in April 2009,” the firm said. “Back then, the strategy rallied 12.25%, so if the next two trading days even see marginal gains, the current rally will set the record.”
Bonds surge
The Vanguard Total Bond Market ETF BND
and iShares Core U.S. Aggregate Bond ETF AGG
have each seen a total return of slightly more than 7% this quarter through Wednesday, according to FactSet data.
That puts the Vanguard Total Bond Market ETF on track for its best quarterly performance on record, while the iShares Core U.S. Aggregate Bond ETF is heading for its biggest total return since 2008, FactSet data show. The iShares Core U.S. Aggregate Bond ETF gained a total 7.4% in the fourth quarter of 2008.
In April 2009, “the bond leg” of the 60-40 portfolio was up just 1.87% on a rolling two-month basis, while in May 2020 it gained 2.25%, the Bespoke note shows.
“During this current period, bonds have rallied an unprecedented 8.87%, which far exceeds any other two-month period since at least 1990,” the firm said. “While they still underperformed stocks in the last two months, they have never acted as a smaller drag on the strategy during a period of strength.”
Bespoke found that the S&P 500, a gauge of U.S. large-cap stocks, is up 14.35% over the last two months on a total-return basis, “which is certainly strong relative to history but not anywhere close to a record.”
The U.S. stock market was trading slightly higher on Thursday afternoon, with the S&P 500 up 0.2% at around 4,791, according to FactSet data, at last check. That’s within striking distance of the index’s closing peak of 4,796.56, reached Jan. 3, 2022, according to Dow Jones Market Data.
As stocks were inching higher Thursday afternoon, shares of both the Vanguard Total Bond Market ETF and iShares Core U.S. Aggregate Bond ETF were trading down modestly, according to FactSet data, at last check.
The yield on the 10-year Treasury note BX:TMUBMUSD10Y
was rising about seven basis points on Thursday afternoon, at around 3.85%, but is down so far this quarter, FactSet data show. Bond yields and prices move in opposite directions.
Bond prices are rallying as many investors anticipate the Fed is done hiking rates — and may begin cutting them sometime next year — as inflation has fallen significantly from its 2022 peak.
As for year-to-date gains, the S&P 500 has surged 26.6% on a total-return basis through Wednesday, while the iShares Core U.S. Aggregate Bond ETF has gained a total 6.1% over the same period, FactSet data show.
U.S. Treasury yields fell Wednesday, as investors considered the outlook for monetary policy and financial markets for the coming year.
The yield on the 10-year Treasury dropped nearly 10 basis points to 3.789%. The 2-year Treasury yield edged down 4 basis points to 4.246%.
Yields and prices move in opposite directions. One basis point equals 0.01%.
In the last week of trading for 2023, investors considered the path ahead for interest rates and how this could impact the U.S. economy and financial markets.
Earlier this month, the Federal Reserve indicated that interest rates will be cut three times next year, with further reductions expected in 2025 and 2026, as inflation has “eased over the past year.”
Many investors have interpreted recent economic data, including the November U.S. personal consumption expenditure price index, as a sign that the Fed would be able to stick to its monetary policy expectations for next year.
Uncertainty remains about when the central bank will start cutting rates, although traders are pricing in an over 70% chance of rate cuts at its March meeting, according to CME Group’s FedWatch tool.
Tech stocks may have been the play for 2023, but for next year Bank of America Securities likes their debt. The bank called investment-grade corporate bonds of technology companies one of its top 10 trades for 2024. “Own tech balance sheets, but not tech EPS in ’24,” investment strategist Michael Hartnett wrote in a Nov. 19 note. The “Magnificent 7” tech stocks — Apple , Alphabet , Amazon , Microsoft , Meta Platforms , Nvidia and Tesla — led the market higher this year. Nvidia, for instance, has skyrocketed a staggering 229% year to date, while Meta is up 190% so far this year. The tech-heavy Nasdaq has gained 39% year to date. Hartnett said his call on the bonds of big U.S. tech companies is a “great, underappreciated contrarian hedge” in a year that will likely see rate cuts from the Federal Reserve and either a “hard landing” or “soft landing” for the economy. “How do you position for unexpected events next year? A decent hedge would be the bonds of companies that have a lot of cash,” he added. “The Magnificent 7 have a lot of cash.” That unexpected event would be a hard landing, according to Harnett. He says the consensus view is a soft landing, or a gradual easing of inflation and the labor market in response to the Fed’s rate hikes. But Harnett expects there is a greater risk than expected that the economy will slow down abruptly. If a hard landing is underpriced by investors, then this outcome unquestionably will be negative for equities, Harnett explained. With the biggest positions in equities in the Magnificent 7, a hard landing would lead to deleveraging of those stocks, he added. It would also be positive for bonds. “You would get some rotation into high quality corporate bonds — and there is nothing more high quality in the corporate bond market than large-cap U.S. tech,” Hartnett said. Overall, he expects money to flow into bonds next year. Buying investment-grade tech corporate bonds is just one side of the firm’s barbell strategy in the asset class, he said. “You certainly want exposure to what we would call the diamonds in the rough — the best house in the worst neighborhood, like banks,” Hartnett said. — CNBC’s Michael Bloom contributed reporting.
Market optimism over the potential for interest rate cuts next year is dangerously overdone, according to former FDIC Chair Sheila Bair.
Bair, who ran the FDIC during the 2008 financial crisis, suggests Federal Reserve Chair Jerome Powell was irresponsibly dovish at last week’s policy meeting by creating “irrational exuberance” among investors.
“The focus still needs to be on inflation,” Bair told CNBC’s “Fast Money” on Thursday. “There’s a long way to go on this fight. I do worry they’re [the Fed] blinking a bit and now trying to pivot and worry about recession, when I don’t see any of that risk in the data so far.”
The Dow hit all-time highs in the final three days of last week. The blue-chip index is on its longest weekly win streak since 2019 while the S&P 500 is on its longest weekly win streak since 2017. It’s now 115% above its Covid-19 pandemic low.
Bair believes the market’s bullish reaction to the Fed is on borrowed time.
“This is a mistake. I think they need to keep their eye on the inflation ball and tame the market, not reinforce it with this … dovish dot plot,” Bair said. “My concern is the prospect of the significant lowering of rates in 2024.”
Bair still sees prices for services and rental housing as serious sticky spots. Plus, she worries that deficit spending, trade restrictions and an aging population will also create meaningful inflation pressures.
“[Rates] should stay put. We’ve got good trend lines. We need to be patient and watch and see how this plays out,” Bair said.
The HSBC Holdings Plc headquarters building in Hong Kong, China.
Paul Yeung | Bloomberg | Getty Images
LONDON — Markets have entered a “new paradigm” as the global order fragments, while heightened recession risk means that “bonds are back,” according to HSBC Asset Management.
In its 2024 investment outlook, seen by CNBC, the British lender’s asset management division said that tight monetary and credit conditions have created a “problem of interest” for global economies, increasing the risk of an adverse growth shock next year that markets “may not be fully prepared for.”
HSBC Asset Management expects U.S. inflation to fall to the Federal Reserve’s 2% target in late 2024 or in early 2025, with the headline consumer price index figures of other major economies also set to drop to central banks’ targets over the course of next year.
The bank’s analysts expect the Fed to begin cutting rates in the second quarter of 2024 and to trim by more than the 100 basis points priced in by markets over the remainder of the year. They also anticipate that the European Central Bank will follow the Fed, and that the Bank of England will kickstart a cutting cycle but will lag behind its peers.
“Nevertheless, headwinds are beginning to build. We believe further disinflation is likely to come at the price of rising unemployment, while depleting consumer savings, tighter credit conditions, and weak labour market conditions could point to a possible recession in 2024,” Global Chief Strategist Joseph Little said in the report.
A new paradigm
The rapid tightening of monetary policy by central banks over the last two years, Little suggested, is leading global markets towards a “new paradigm” in which interest rates remain at around 3% and bond yields stick around 4%, driven by three major factors.
Firstly, a “multi-polar world” and an “increasingly fragmented global order” are leading to the “end of hyper-globalisation,” Little said. Secondly, fiscal policy will continue to be more active, fueled by shifting political priorities in the “age of populism,” environmental concerns and high levels of inequality. Thirdly, economic policy is increasingly geared towards climate change and the transition to net-zero carbon emissions.
“Against this backdrop, we anticipate greater supply side volatility, structurally higher inflation, and higher-for-longer interest rates,” Little said.
“Meanwhile, economic downturns are likely to become more frequent as higher inflation restricts the ability of central banks to stimulate economies.”
Over the next 12 to 18 months, HSBC AM expects investors to place greater scrutiny on corporate profits and the ongoing debate over the “neutral” rate of interest, along with a heightened focus on labor market and productivity trends.
‘Bonds are back’
Markets are now largely pricing a “soft landing” scenario, in which major central banks return inflation to target without tipping their respective economies into recession.
HSBC AM believes the increased risk of recession is being overlooked and is positioning for defensive growth alongside a prevailing view that “bonds are back.”
“A weaker global economy and slowing inflation are likely to present a supportive environment for government bonds and challenging conditions for equities,” Little said.
“Therefore, we see selective opportunities in parts of global fixed income, including the U.S. Treasury curve, parts of core European bond markets, investment grade credits, and securitised credits.”
HSBC AM is cautious on U.S. stocks, due to high earnings growth expectations for 2024 and a stretched market multiple — the level at which shares trade versus their expected average earnings — relative to government bond markets. The report analysis sees European stocks as relatively cheap on a global basis, which limits downside unless a recession materializes.
“Japanese stocks may be an outperformer among developed markets, in our view, due to attractive valuations, the end of unconventional monetary policy, and a high-pressure economy in Japan,” Little said.
He added that idiosyncratic trends in emerging markets also warrant a selective approach rooted in corporate fundamentals, earnings visibility and risk-adjusted rewards. If the Fed cuts rates significantly in the second half of 2024 as the market expects, Indian and Mexican bonds and Chinese A-share stocks — domestic shares that are dominated in yuan and traded on the Shanghai and Shenzhen exchanges — would be some of HSBC AM’s top emerging market picks.
India’s post-pandemic rebound and rapidly growing markets and Japan’s continued exit from unconventional monetary policy render them as attractive sources of diversification, Little suggested, while Chinese growth is widely projected at around 5% this year and 4.5% in 2024, but could also benefit from further fiscal policy support.
“Asian equities are in a stronger position in terms of growth and are likely to remain a relative bright spot in the global context,” Little said.
“Regional valuations are generally attractive, foreign investor positioning remains light, while stabilising earnings should be the key driver of returns next year.”
Asian credit should also enjoy a much better year as global rates peak, most regional economies perform well and Beijing offers an additional fiscal boost, he added.
The U.S. economy continues to grow despite the 5.5% benchmark federal funds interest rate set by the Federal Reserve in 2023.
The Fed’s leaders expect their interest rate decisions to eventually slow that growth.
The increase in borrowing costs that stems from Fed decisions does not affect all consumers immediately. It typically affects people who need to take new loans — first-time homebuyers, for example. Other dynamics, such as the use of contracts in business, can slow the ripple of Fed decisions through an economy.
“It might not all hit at once, but the longer rates stay elevated, the more you’re going to feel those effects,” said Sarah House, managing director and senior economist at Wells Fargo.
“Consumers did have additional savings that we wouldn’t have expected if they had continued to save at the same pre-Covid rate. And so that’s giving some more insulation in terms of their need to borrow,” said House. “That’s an example of why this cycle might be different in terms of when those lags hit, versus compared to prior cycles.”
A 1% interest rate increase can reduce gross domestic product by 5% for 12 years after an unexpected hike, according to a research paper from the Federal Reserve Bank of San Francisco.
“It’s bad in the short term because we worry about unemployment, we worry about recessions,” said Douglas Holtz-Eakin, president of the American Action Forum, referring to the paper’s implications for central bank policymakers. “It’s bad in the long term because that’s where increases in your wages come from; we want to be more productive.”
Some economists say that financial markets may be responding to Federal Reserve policy more quickly, if not instantaneously. “Policy tightening occurs with the announcement of policy tightening, not when the rate change actually happens,” said Federal Reserve Governor Christopher Waller in remarks July 13 at an event in New York.
“We’ve seen this cycle where the stock market moved more quickly in some cases, more slowly in other cases,” said Roger Ferguson, former vice chair of the Federal Reserve. “So, you know, this question of variability comes into play, as in how long it’s going to take. We think it’s a long time, but sometimes it can be faster.”
Watch the video above to see why the Fed’s interest rate hikes take time to affect the economy.
The point? If a GIC investor is looking to lock in a good long-term interest rate, they may want to consider some bond exposure as well to diversify. If rates do in fact fall, bonds could do very well.
Regardless, for a conservative investor, earning a return in the 6% range from a GIC is pretty enticing.
If you are considering a GIC in a taxable account like a personal non-registered account or a corporate investment account, tax is a factor.
If an Ontario investor with $100,000 of income earns a dollar of interest income, they pay a marginal tax rate on that dollar of about 31%. So, buying a 6% GIC leaves only about 4.1% after tax.
If that same investor bought Canadian stocks and earned a 6% return with 2% from dividends and 4% from capital gains, selling after a year, the tax would be less. The tax rate on the dividend income would be about 9% and on the capital gain would be about 16%. The after-tax return would be about 5.2%, over 1% higher than the GIC investor earning the same 6%.
Depending on the dollar value of the GIC or stock, the income could push the investor into a higher tax bracket than the marginal rates referenced above, but the outcome would be similar, with stocks being more tax efficient. The tax savings for stocks over GICs would also apply in other provinces.
As a result, a stock investor could earn a lower rate of return than a GIC investor in a taxable account and still keep more of their after-tax return. Stocks generally return more than GICs or bonds over the long run, despite the year to year volatility. This is an important consideration for a GIC investor when tax is considered. After all, it is your after-tax return that really matters.
U.S. stocks have jumped back near to their summertime highs, a big rebound as investors enter the holiday season with Black Friday just days away.
The shopping frenzy expected on Friday, the day after Thanksgiving, kicks off a spending spree for the holidays that could help buoy stocks after their surge this month.
Ermotti told CNBC on Wednesday that he was “more than encouraged” by the massive oversubscription received for last week’s return to the market.
“The AT1 demand was incredible — $36 billion of demand for what happened to be $3.5 billion of placements — and in my point of view, it was probably the highlight in a sense of the confidence is restoring not only for UBS, I would say also it is a signal to the Swiss financial system,” Ermotti said.
“The first reactions were based on emotions or people that were very loud because they had their own interest, but I think that, as time went by, people had enough chances to really look at the idiosyncratic situation, and also probably look more carefully into the prospectus of what is written,” Ermotti told CNBC’s Joumanna Bercetche on the sidelines of the UBS Conference in London.
“Those bonds were designed to be there for those kind of situations so I think that people over time, or the vast majority of the people, are coming down to a more balanced way of looking at matters,” he added.
UBS CEO Sergio Ermotti discusses the high demand for the Swiss bank’s recent issuance of AT1 bonds and shares his thoughts on the outlook for central banks.
