Investment Q&A

In theory, long-term bond prices are more sensitive to changes in the interest rate, however, this assumes that all durations of the yield curve drop by similar amounts. What this means is that various parts of the yield curve can move independently of each other. For example, the short end of the Canadian bond yield curve is dropping today (1 and 2-year yields), whereas long-term yields are rising (5 year and above). This has to do with the expectation of near-term cuts (short end of the curve) vs. the long-term expected 'terminal' rate (ie. where interest rates will settle 5+ years from now). 

After the Federal Reserve's recent interest rate meeting, although it cut by a large amount (50 bps), they announced that their expectations for where rates will eventually stabilize years from now was higher than previously expected. This caused long-term bond yields to rise, while short-term bond yields dropped. 

We believe that there is a lot of value in short-term bonds currently, as it is likely that interest rates continue to be cut in the near future. Although, we feel long-term bonds have less upside potential in the near term due to uncertainty around where they will end up years from now. 

We would prefer either an aggregate bond ETF (AGG, VAB) or a short-term bond ETF (XSB) given these circumstances.