Banks have been a big winner. Not only does it appear Trump is poised to loosen strong bank regulations, but it looks as though his policies will cause an increase in interest rates. That’s good news for the sector.
It’s been bad news for bond investors, however. Shares of Canada’s largest fixed-income ETF, the iShares DEX Universe Bond Index Fund (TSX:XBB) are down nearly 2% since Trump was elected. That doesn’t seem like much, but it’s a big move in the world of bonds.
The iShares Core Canadian Long Term Bond Index ETF (TSX:XLB) has performed even worse, falling more than 3%.
This could just be the beginning of a long-term bear market for bonds. If Trump spends aggressively on many of his campaign promises, it would lead to higher government deficits. It would also likely lead to inflation, which would inevitably cause the Federal Reserve to raise rates.
While Canadian and U.S. interest rates do tend to move together, it’s not a given Canadian rates will increase. Our economy is still uncertain, certain areas are still reeling from commodity weakness. Canadian central bankers also have to worry about our housing bubble and generally indebted consumer.
Still, the trend is something investors shouldn’t ignore. Many investors use bond ETFs as GIC substitutes, stashing cash in them for a few months before it’s used somewhere else. If that’s the case for you, perhaps it’s time to consider taking capital out of these ETFs.
