Q: Hello 5i team,
I recently subscribed and bought a significant qty of CSU debentures @ the strike price of 133.
With the Canadian economy perhaps going into a recession? and rate cuts, how would you project the price to behave over one year? The percentage drop in price is more than the yield. Can one expect a total return of 8% for the next year? Would you suggest a sell and deploy in stocks?
Appreciate your analysis on the subject.
Regards
Rajiv
I recently subscribed and bought a significant qty of CSU debentures @ the strike price of 133.
With the Canadian economy perhaps going into a recession? and rate cuts, how would you project the price to behave over one year? The percentage drop in price is more than the yield. Can one expect a total return of 8% for the next year? Would you suggest a sell and deploy in stocks?
Appreciate your analysis on the subject.
Regards
Rajiv
5i Research Answer:
The interest rate on these debentures is set once a year (March 31), tied to the CPI rate. The rate is 6.5% plus the CPI change (year over year). If there is deflation, the rate will move lower (6.5 plus a negative CPI) but cannot go below zero. While inflation is getting under control, we think we are still aways from deflation, and next year's rate might be 6.5% plus 2.5%. Slowing inflation could see the bonds drift a bit, so 7% to 8% total return might be expected. We would be fine continuing to hold these as an inflation hedge, and as very high quality debentures. But they should be considered part of a fixed income allocation, and different from equity exposure.