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Fixed Income -What to Expect in the Year 2024

The last two years will be recorded as the two most volatile years in the history of fixed income. There was a 10.115% decline in 2022 and an 8.323% gain in 2023. But that is the past; what do we expect this year?

In this period, the Bank of Canada raised the rate by 4.75% (Year 2022 – 4.00%, Year 2023 – 0.75%). Meanwhile, CPI in Jan 2022 was at 5.1%, peaked at 8.1%, and ended at 3.4% in December 2023.

The effective yield of the index at the beginning of the year 2022 was 2.43% with a modified duration of 7.00. The cumulative effect of the 400bps increase in rate caused the index to decline by 10.115% (The total decline was higher, as expected returns were 2.43%, has there been no change in interest)

In the year 2023, we had a rate increase of 75bps; we did not see the impact of this change as investors started seeing this as overdoing by the banks, as inflation was already showing declining trends. The effective yield dropped by 51 bps, resulting in a gain of 8.323%.

We have ignored the spread changes as they were range-bound and gradual changes.

What’s in for the year 2024? With an expected return of 4.82% (Effective yield at the beginning), assuming no change in rates. The economy is doing okay for now, but there is a looming recession risk followed by a rate cut by the Bank of Canada. This could add 2.5% to 3.5% to the returns. Net, we could expect 7.0% to 8.5% for the year 2024.


Rounak Langhe

MBA, CFA - Chief Investment Officer and Portfolio Manager

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