Three top picks from Odlum Brown’s Hank Cunningham

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Hank Cunningham is fixed income strategist at Odlum Brown.

Top Picks:

I recommend that investors buy four- and five-year maturities of investment grade bonds. All of these are "A" rated. The purpose of this strategy is to protect principal while creating positive, albeit modest, returns. As these bonds are relatively short-term and with the yield curve still steep, they will benefit from lower yields as they move closer to maturity.

Shoppers Drug Mart 2.36% May 24, 2018
$100.42, 2.25%

Brookfield Asset Management 3.95% April 9, 2019
$105.02, 2.83%

Bell 3.35% June 18, 2019
$103.35, 2.62%

Past Picks: May 6, 2013

Bell 3.35% June 18, 2019
Then: $104.68; Now: $103.35 2.63%; Total return:+2.03%

Reliance Lp 4.574% March 15, 2017
Then: $105.29; Now: $105.48 3.11%; Total return:+4.41 %

H&R REIT 5.00% December 1, 2018
Then: $109.63; Now: $108.45 2.697%; Total return:+3.51 %

Total return average: +3.41%

Market outlook:

For the past two months, we have reiterated our view that bonds were overvalued and yet bond prices have continued to advance, making new highs for the year. With yields in Europe continuing to tumble, U.S. bonds look relatively inexpensive!

We believe that bond yields, and inflation, are in the process of bottoming. The U.S. economy is reaccelerating meaningfully in almost all sectors and China's economy is exhibiting some signs of stabilizing.

Commodity prices, as measured by the CRB Index, are up 9 per cent thus far this year. On the wage side, there has been little in the way of pickup but the pressures are building.

Overall, most of the forces which have driven bond yields to these levels remain in place. They are:

• 1. Global shift to bonds from equities by institutional investors;
• 2. Demographics argue for continued investment of savings in fixed income securities;
• 3. The weakness in Euro Zone inflation;
• 4. The continuation of record low administered short term interest rates.

Thus, while we think that bond yields will begin to move higher, any such advance will be muted by the above factors. After the robust returns from bonds this year, fixed income investors should brace for modest results over the balance of the year As the U.S. economy reaccelerates and normalizes, bond yields will likely drift towards the rate of growth in nominal GDP. This would put the yield on the ten-year U.S. note in the area of 3.5 per cent eventually but, in the interim, the forces at work will conspire to keep their yield under 3 per cent.