Interest Rates Beginning to Settle. What's Next for Your Portfolio?

With the Bank of Canada holding the policy rate steady this month at 5% (Financial Post), it might be time to reconsider some of the interest rate sensitive securities that have been beaten down in the marketplace. 

Since reaching a low of 0.25% in 2022, rates have been steadily rising as the Bank of Canada combats inflation (CTV News). With inflation now starting to turn lower, and consumers showing some signs of fatigue, policymakers at The Bank have let off the gas, indicating that there might be some relief (or at least no new pains) in sight for rate sensitive borrowers.

What does this mean for your portfolio? Utilities, REITs, Preferred Shares, and other rate sensitive assets might start to look a lot more attractive on a real return basis. Canadian Utilities (CU.TO), Riocan (REI-UN.TO), and George Weston Preferred Series A (WN-PRA.TO), are down 15%, 17%, and 7% respectively Year-to-Date. Fear of further rate increases have pushed these assets lower. Now that rates have paused, investors might start taking another look. 

Is the Bank set to lower rates soon? Likely not, at risk of stoking further inflation. However, Canadian households are heavily indebted, which makes further rate increases a particularly risk proposition for the Bank of Canada, which is tasked with promotion financial stability. In a report by the CMHC: ""Canada's very high levels of household debt — the highest in the G7 — makes the economy vulnerable to any global economic crisis... When many households in an economy are heavily indebted, the situation can quickly deteriorate, such as what was witnessed in the U.S. in 2007 and 2008" (CBC News). 

This also might mean the return of the 60/40 investment portfolio, which has been a bit of a pariah as of late. This portfolio allocates 60 percent to equities, and 40 percent to bonds, and was popularized by financial gurus of the past, including John Bogle at Vanguard (New York Times). With bond yields rising over the last year, bond prices were getting hammered, and this was leading to poor returns for many 60/40 investors. With yields starting to stabilize, and even turn lower, you have seen much more positive returns for the 60/40 balanced portfolio. 

Remember, don't put all your eggs in the same basket, and maintain caution. 

Happy investing everyone. 

- Matthew. 

Tim Horton's Raising Prices: Others Might Follow.

In an attempt to curb the effects of price inflation on its key inputs, Tim Horton's (TSE:THI) is increasing the prices that consumers will pay for its basic products. The company has begun displaying signs at most of its stores declaring that the price increases will be effective April 11th.

Interestingly, the company has yet to state how large the price increases will be, but they have assured their customers that they will be reasonable, and that their products will still represent a good value for customers. To be sure, considering most chains charge more for their cups of java, the company does have some room to increase prices. In addition, like any good business with a valuable brand name, Tim Horton's will surely be able to increase prices while not significantly altering the loyalty of their customer base. 

The primary reason for the price increase has been the spike in arabica coffee, the main bean that Tim Horton's uses to brew its iconic cup. To be sure, it is up more than 80 percent since June of 2010! And even Starbucks (NASDAQ:SBUX), already known for selling an expensive cup, has stated that it has not ruled out raising prices to recoup the increase in coffee bean prices.

For Tim Horton's, it is not at risk of losing significant market share from this move, so it is a wise choice for their intelligent investors. Starbucks, on the other hand, has said that it will not raise prices at the moment in fear of losing customers... Tim Horton's shareholders should be proud of their entrenched brand value that allows such prices increases.

Happy Investing!

For more information, check:

(http://www.cbc.ca/news/business/story/2011/01/27/starbucks-coffee-prices.html).