WEBVTT 1 00:00:06.510 --> 00:00:10.170 Recent volatility has many investors concerned with the decline in government 2 00:00:10.170 --> 00:00:11.790 bond yields, and at Canso, 3 00:00:11.790 --> 00:00:14.790 we're very concerned with the new highs in the duration of the Canadian 4 00:00:14.790 --> 00:00:15.930 Corporate Bond Index. 5 00:00:16.080 --> 00:00:19.800 Duration is a measure of the bond's sensitivity to changes in interest rates. 6 00:00:20.160 --> 00:00:23.850 A longer-duration bond will be more sensitive to interest rate changes, 7 00:00:23.970 --> 00:00:25.050 all else being equal. 8 00:00:25.350 --> 00:00:28.530 Here's a chart showing the historical duration of the Canadian Corporate Bond 9 00:00:28.530 --> 00:00:32.940 Index. As you can see, today's duration, hovering around seven years, 10 00:00:32.970 --> 00:00:36.870 is at an unprecedented level relative to where the index has been over the last 11 00:00:36.870 --> 00:00:41.490 25 years. The recent increase can be attributed to lower government bond yields, 12 00:00:41.580 --> 00:00:42.720 tighter credit spreads, 13 00:00:42.900 --> 00:00:46.620 and issuers taking advantage of borrowing well out the yield curve at lower 14 00:00:46.620 --> 00:00:47.220 rates. 15 00:00:47.220 --> 00:00:50.670 While longer-duration portfolios have benefited from the recent falling rate 16 00:00:50.670 --> 00:00:53.610 environment, they have also increased their interest rate risk. 17 00:00:53.820 --> 00:00:56.340 In a scenario where rates begin to normalize, 18 00:00:56.340 --> 00:01:00.390 those portfolios will be exposed to bigger losses than ever before. Going back 19 00:01:00.390 --> 00:01:01.223 to the chart, 20 00:01:01.530 --> 00:01:05.550 the index duration prior to the credit crisis was around 5.5 years. 21 00:01:05.700 --> 00:01:10.320 A 100 basis point increase in interest rates would have cost you a net loss of 22 00:01:10.320 --> 00:01:13.680 5.5% of your portfolio's value. Today, 23 00:01:13.680 --> 00:01:15.600 at a duration of around seven years, 24 00:01:15.750 --> 00:01:19.590 that same rise in rates would now cost you 7% of your portfolio's value. 25 00:01:20.250 --> 00:01:24.150 We at Canso only assume risk on behalf of our clients when we're compensated for 26 00:01:24.150 --> 00:01:27.270 doing so, and we fear the fall in yields may reverse, 27 00:01:27.420 --> 00:01:30.060 which would be a disaster for longer-duration assets. 28 00:01:30.600 --> 00:01:34.650 For more on this and what else is going on in the corporate bond market, 29 00:01:34.710 --> 00:01:37.830 read the latest Corporate Bond Newsletter at cansofunds.com.