The Time is Still Now: Capitalize on Falling Interest Rates with this BMO Mutual Fund
As the Bank of Canada’s monetary easing accelerates, the environment is still attractive for seizing fixed income opportunities.
November 2024
Sheldon Quan King
Senior Product Manager, BMO Global Asset Management
The past few years have been a challenging period for fixed income investors. A decade of extremely low interest rates was followed by one of the most aggressive monetary tightening in decades to tame the surging inflation. This rapid cycle of rate increase since March 2022 led to record levels of money flowing into cash and short-term debt, including money market Exchange Traded Funds (ETFs), which currently sit at just over $25 billion in Canada.1
Money Market ETF Flow Trends
The environment of higher interest rates offered an easy outlet for investors to collect higher yields of about 5%2 from money market products and targeting short end of the curve. This opportunity, however, is fading as the slowing rate of inflation prompts central banks to cut interest rates in Canada.
The impact of falling Interest rates
As interest rates fall, the yields on money market instruments will also decrease. Anticipating the yield curve steepening, interest rate normalization over time pushes investors to consider longer-duration bonds and to look for other opportunities.
Falling rates also present an opportunity for capital appreciation. Bond prices move inversely to interest rates, meaning as interest rates decline, bond prices rise. With rates widely expected to continue coming down for a prolonged period, adding duration to your portfolio could be a strong driver of performance in the period ahead.
More rate cuts on the horizon
Statistics Canada’s inflation report for September shows that inflation has fallen below the Bank of Canada’s (BoC) 2% target rate, paving the way for further rate cuts. The BoC followed suit at its October 23 monetary policy meeting, lowering rates by 50 basis points.
Looking ahead, projections for the rest of 2024 call for at least 0.25% of additional monetary easing, with more to follow in 2025 potentially bringing rates down to a target range of about 2.25% - 3.25%. There is also the possibility that the Bank can get more stimulative and take the overnight rate below 2.25% over time if the economy weakens more than anticipated. Given the potential for future rates cutes, the time is still right to take advantage of opportunities in the fixed income market.
BMO Aggregate Bond ETF Fund: A core fixed income solution
The BMO Aggregate Bond ETF Fund is a core fixed income solution for many investors. It offers broad diversification through access to the full spectrum of the Canadian bond universe, including investment-grade government, provincial, and corporate bonds. With duration of about seven years, it can help position portfolios to benefit ahead of further interest rate normalization. The Fund has done much better since rates have started to move lower, returning about 12% over a one-year period and 4% year to date (for Series F).3
Also available as an ETF: BMO Aggregate Bond Index ETF (ZAG)
Annual Compound Returns
YTD |
1 Mo. |
3 Mos. |
6 Mos. |
1 Yr |
3 Yr |
5 Yr |
10 Yr |
Since Inception |
|
BMO Aggregate Bond ETF Fund |
4.0% |
1.9% |
4.6% |
5.4% |
12.4% |
- |
- |
- |
4.5% |
As of September 30, 2024. Inception date: March 29, 2023.
Footnotes
1 NBF ETF Research, Bloomberg. As of September 30 2024.
2 Based on gross yield of the BMO Money Market Fund ETF Series, as of May 13, 2024 (5.15%).
3 BMO Global Asset Management, as of September 30, 2024.
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This article was published on November 1, 2024.
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BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
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