Canada, like most Western nations, has been forced to incur a massive amount of debt to battle the impacts of the coronavirus pandemic. This reality has ballooned the country’s budget deficit to levels not seen in some time. With new projections of a forecast budget deficit of approximately $350 billion, the country’s debt-to-Gross-Domestic-Product ratio is expected to increase to approximately 50%. This is a level many thought was unheard of prior to the pandemic.
This level of debt increases the amount the Canadian government must pay in interest to bond investors. This reality is not bullish to long-term spending increases.
Coronavirus and other factors have created an environment where revenues are not able to increase due to a prolonged economic recession. Governments around the globe thus have a vested interest to keep interest rates low and continue to force bond yields toward zero for years to come, providing investors with a longer-term investing backdrop.
With yields expected to remain low for longer, fixed income assets are likely to remain out of favour for some time. This will force investors to consider equity or risk assets as well as real assets or alternative investments that provide much higher yields.
Those with retirement accounts should therefore consider staying invested through the volatility that may be ahead. They should focus on equities with decent yields and strong balance sheets for the time being.
Invest wisely, my friends.
