The Canadian Investor - Are Canadian Banks in a Bubble?

Episode Date: July 27, 2026

In this episode of The Canadian Investor Podcast, we look at whether Canadian bank stocks have become too expensive after their big run. We discuss David Rosenberg’s recent Globe and Mail article, the valuation of the big banks, why earnings growth may not be as strong as it looks, and whether investors should consider trimming or simply holding. We then revisit bonds and fixed income. After one of the worst stretches ever for long-duration bonds, do they still deserve a place in investor portfolios? We look at why the traditional 60/40 portfolio worked so well for decades, what changed after 2020, and why shorter-term Treasury bills may be more attractive than long-term bonds in the current environment. Tickers discussed: RY.TO, TD.TO, BNS.TO, BMO.TO, CM.TO, NA.TO, ZEB.TO, JPM, BAC, C, WFC, TLT, BIL Subscribe to our Our New Youtube Channel! Check out our portfolio by going to Jointci.com Our Website Our New Youtube Channel! Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Fiscal.ai for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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Welcome to the Canadian Investor Podcast. I'm Simo Ben-Age. I'm here with Dan Kent. We have a fun episode coming up today. We'll be starting with a recent article that was published by David Rosenberg in the Globe and Mail, asking if Canadian banks are in a bubble. So we'll go over that and you'll give your thoughts. I'll give me my thoughts as well. We'll be showing some charts. So if you're hearing this on audio, you can always hop on YouTube. The full video will be posted on YouTube. as well. Our Patreon subscribers at join tCI.com do get it early, an early release for the full video, but YouTube it will be posted on Monday. And we'll be just showing some charts whether we agree or not with David. And then afterwards, we'll be talking about bonds and whether they still have a place in your portfolio. So about a month or three weeks ago, we did an episode where we talked about bonds versus

bond ETFs. And we generally looked at it, whether it. it was still a good look or not for the portfolio, but we only went over at a glance for that more specifically. In this one, I'll specifically look at whether bonds or bond ETF makes sense in a portfolio going forward, some of the risk versus some of the historical returns and why the 6040 portfolio has performed so well. So some really interesting charts that I'll be sharing with that.

But we'll get started with the Canadian banks because I think this is where a lot of people are looking forward to whether David Rosenbert is out to lunch or not, are the banks in a bubble? Dan get us started on that. Yeah, so I think the term bubble is kind of thrown around way too loosely now. Whether it's, I mean, this whole AI thing that is causing a lot of bubble talk or, but it just seems like every industry or sector that gets slightly expensive, people start calling a bubble. I think, I don't think you can call these companies. They're trading at 17 X earnings and posting, you know, right now 17 plus percent returns on equity.

I don't really think you can call them a bubble. I mean, there is plenty of bubbleish spaces, I guess, on the market that I would say. And I really don't think banks are one of them. I'm not really all surprised at the title of the article, however, because, I mean, it gets clicks. The one thing I will say because a lot of people will probably be paywalled from this, because it's on the Globe and Mail. Yeah. The article is not as bad as the title makes it out to be.

Like, it's actually a pretty reasonable piece talking about the banks. So if you can't read it, it's not as bad as it seems. He's not saying these banks are going to collapse and they're in a bubble. He's mostly just talking about how they're getting a bit too expensive right now. And this is, as you had mentioned coming from, I would call him a perma bear, David Rosenberg. he's kind of another one of those guys who kind of like burry predicted the the 2008 crash but then kind of went on to predict numerous other you know kind of bearish scenarios over like two decades and yeah is in the line where he's predicted the last 10 crashes that never happened or something

like that he's predicted nine of the last two recessions now to be fair i've listened to him quite a bit he's been on podcast i've read a lot of his stuff as well and he's a very smart guy, very ease into the data. And like we were talking before recording, I think we could look back in 10 years from now, 15 years from now, and just look back at some of the predictions that David Rosenberg did and just say, okay, he was just early on those predictions. Of course, in investing early is as bad sometimes as being wrong. So you have to keep that in mind.

And another quick note, if you do have Apple News, you should be able to get this article included for free with your Apple News Plus. So for Apple subscribers, I just wanted to mention that because that's how I pick up a lot of the paywall content for stuff like the Globe and Mail. Yeah, it's, he is, he is a very smart individual. I'm not going to say he isn't. He was mostly, like generally, he's just been bearish on U.S. equities. I think, I know he's fairly bullish gold.

I think anyway, he's bullish gold. He was, he was bullish, fiction. income bonds as well, which hasn't, hasn't turned out too well. But he's not just kind of a fear-mongering type perma bowl, like, or perma bear. I mix that term up so many times. I don't know why. But it's okay. There's a lot of, there's a lot of good insights into what he's saying. He's just been kind of wrong on them for a long time. And like you said, like being early, we went over this with the equal weight S&P 500 ETF. Like if you should transition from cap weighted to equal weighted. And we had mentioned there again. Being early is just as bad as just being wrong. So, so yeah, I mean,

my opinion out there immediately and then dig into the details. No, I don't think the banks are in the bubble. I just think it's way too loosely used of a term right now. When you look at a bubble, when you think of a bubble, it's effectively, you turn into greater fool theory. So you just got to hope that somebody else is willing to pay what, you know, the stock is trading at right now. valuation multiples expand rapidly, don't really follow fundamentals. And once, you know, the fools disappear, the stock craters, and usually in those types of situations, it's 50, 60, 70 plus percent. So I think the headlines is- The prices are almost distorted from reality, right? Like, that's a good way, I think, to frame it. The, I agree with you. The bubble term may be overused a bit.

I think it's more applicable to what we're seeing in AI right now, though some will argue that a lot the high-flying AI names that we're seeing are still putting some really solid earnings. But then again, I think there's counter arguments for that where I think there's definitely more of an argument for AI for the banks. I think I would agree. And we'll be showing some of the stuff that David is referring to in that article and what's leading him to believe that. I wouldn't say like he's really saying it's in a bubble.

That's probably more the title. I think it's more he's saying that they're overvalued. is probably a better term. Yeah, they're just too expensive right now, which I would tend to agree. So if you look at the banks right now, they're trading in around 60% premiums to their historical averages. So it is no doubt expensive. But if you actually ignore the headline and dig into the piece like you had mentioned,

he really doesn't mention that they're in a bubble at all. He just kind of speaks on how expensive they are. And I own bank stocks myself. I will likely never sell the banks outside of just routine rebalancing when I need to. And if they continued to run up the way they were, I probably would take a bit more off the table at the end of the year. I typically do it at the end of the year. I did it last year. Again, I thought they were expensive last year, so I kind of trimmed a bit back.

And I was wrong. They're up, you know, quite a bit. If we look to ZED, BMO's equal weight banking ETF, it's up 33% this year, probably 33%. probably 35% plus with dividends and it is up 70% on the year. So they've done very well. And it's kind of like bank stocks impact on the TSX right now is kind of, it's similar to AI stocks in regards to the SB 500. It's not as drastic.

But right now, Canadian banks make up over 25% of the entire TSX. I don't know if we've ever hit this level of concentration. You won't get, you know, there's a lot of available data on the S&P 500's concentration. You won't really get this with the TSX. But from what I have read, they've never made up a quarter of the index. So you're getting pretty high there. And one of his main points and the one that I actually do agree with is the earnings quality of the big banks right now. A large amount of the growth is just coming from decelerating provisions and capital markets.

I'll get to that in a bit. but we saw large buildups and provisions over the last few years, which kind of impacted earnings. And now those provisions are, they're not necessarily going away, but they're just, they're decelerating quite a bit. And the only issue here is once that tailwind goes away, which it inevitably will, like provisions, they will either kind of flatline or continue to slow even further or potentially even go up a bit, like what ends up happening. And as someone who kind of, who holds the banks and kind of into them quite a bit comes an earning time. You can definitely see this.

Like loan and deposit growth are not particularly strong among all of the Canadian banks. I don't really want to call it weak. It's not certainly something that warrants 70% plus share price increases, though. So I think most of the banks are growing deposits and loans in maybe the low to mid single digits. I might be wrong on a few. Some of them are doing quite well. But most of them, the underlying growth of the loan side of the business, is really not doing all that well.

And then you factor in the capital market segments. Those have absolutely exploded over the last while. And they're going to be coming up against some very difficult year-over-year comparables. And this segment is the one that's ultimately at the mercy of the markets in general. If they turn soft, if inflows slow down, the markets dip, whatever it may be, wealth management slows down. This segment will get hit. It's just kind of the way it goes. It's arguably the most lumpy segment, I guess you could call it, of,

of the banks and it has been forever. And then there's the other element of the mortgage renewal wall, which is, I mean, I'm kind of iffy on this. It's just, it just seems like over the last two or three years here, it's been like, oh, you just wait and see type situation. But it just,

it's never really happened. Is it still a risk? Sure. But many Canadian homeowners have absorbed higher rates coming out of the pandemic very well. Like the mortgage, the mortgage portfolios of these banks are really not under a lot of pressure. So I know he does talk about the mortgage renewal wall, which, you know, was supposed to happen last year.

Now it's going to happen this year. And then he kind of mentions that it could happen in 2027 again. I just don't, I don't really buy that side of things anymore. I don't think it's a massive issue. But if you look to valuations, and I think, are you going to show that chart here? I guess you can show the earnings chart here. For the highest quality Canadian banks, we're sitting at probably around. 17 X earnings. So I'm pretty sure Royal is above this. National is probably pretty close to that as well.

And when you look to 10 year historical averages, these banks, oh, so Royal is that, that's got to be Royal at 18.2. Yeah. Yeah. So you're talking 18x earnings for Royal Bank. And if you look at this chart, they have traded, I mean, you go back to 2016. They have traded nowhere near this outside of the short spike in December that they all spike done. but not even close to this for the last decade. So when you look to price the book multiples, I don't know if you have price to book up there as well, but price to book is quite high as well.

So you're looking at... I mean, yeah, for those listening to audio, it's up into the right. Like it's not as you'd expect for a bubble, but it's definitely, it stands out when you look at the charts where you're looking at the last, you know, six months roughly, half a year and it stands out very there's a big contrast versus the previous 10 plus years yeah like these banks i think royal maybe would have traded around 2x book and you can kind of tell

by this chart that would have been pretty much it maybe 1.8 to 2x but that like the other banks have it's actually rarely over 2x it's very rarely over 2x but yeah yeah so these banks barely ever trade at the valuations that they're trading at outside of like you mentioned the last six months. So you see many of the banks growing at a 20% plus clip, but pretty much every one of them is followed by kind of declining provisions and accelerating capital markets. So I think a lot of these banks over the last quarter, I think provisions were declining like 30%. Yeah, you can see here. So to the far left, you see the provisions that were back a year ago, so Q2 of 2025. And then just compare that to the most recent quarter.

So I think the only bank that was about in line was CIBC. I think everything else is lower provisions on a year over year basis. Yeah. And the reason CIBC is kind of the way it is right now is because they would have been previously, that's why they did so good in probably 2024, is they booked a ton of provisions earlier on and then realized they kind of overdid it. So they started decreasing provisions way before the other banks. So that's kind of why you see them flat.

Whereas if you look to Royal in Q2 2025, they have $1.4 billion. Now they're down to $912 million. So it's definitely declining provisions, which is vaulting a lot of these banks right now. If that kind of went away, earnings would not be growing at the clips that they are. So you have that. And then you have the capital markets, which are. two situations that will inevitably fade away. I mean,

you can only lower provisions for so long. And the capital markets can only stay strong for so long. I mean, it's, it's pretty much, you know, if you look to the banks throughout the past forever, it's just,

it's such a business that is, you know, the capital market segment is an absolute rollercoaster. If the markets go flatter, if the markets go down, they're going to struggle in that area. So they are Canadian banks right now, are some of the most expensive banks in the world valuation-wise.

You could get U.S. banks for cheaper. You can get European banks for cheaper. So I don't know if you have anything you want to go over here. Yeah, well, I actually pulled before we started recordings. I wanted to show some interesting visuals here. So the price to book, if you look at the U.S. banks, I only took four that were probably the most comparable to the Canadian bank. So J.P. Morgan, Bank of America, City Group, and Wells Fargo.

Some people may ask, oh, why didn't you put Goldman's side? or Morgan Stanley, it's because they're more like wealth management investment banks where these are a bit more diversified. They're not perfect comparison to the Canadian banks, of course, but it's a better comparison than the other two. And they're obviously some of the larger US banks. And then if you looked at the Ford P, again, comparing that to the Canadian ones, it looks way more attractive for the US banks. So JP Morgan is trading at the highest multiple. at 14 and then you have the lowest multiple of city group at around 11 and then the other two are in between and then when you look at the canadian banks the cheapest canadian bank is bank of

nova scotia at 14 and you have royal at 18 so you can see that you're essentially paying the same price for bank of nova scotia versus a jp morgan and i'm not a bank expert but if you ask me what do you prefer between jp morgan and bank of nova scotia I will buy J.P. Morgan every single time if they're at the same price. Yeah, you have probably the best U.S. Bank versus a Canadian bank, which is pretty much going through like a full-blown turnaround right now because its Latin American segment was doing so poorly. And you have to pay more for Scotia than you do JP. It's the largest bank in the world. Yeah.

Yeah, and it's trading at a cheaper book multiple and it's trading at a cheaper, well, actually, no, it's not trading at a cheaper book multiple than Scotia, but I think on an earnings basis, it's about the same, slightly cheaper. So, like I said, the article, like he mentions that the fundamentals are there, but the price is just way too high right now, which is, but yeah, I would tend to agree. I don't think the article is that bad. I think a lot of people are reacting negatively to it because they don't even read it. A lot of people won't even read the article to just see the title. Yeah. There is an old saying in investing. It's not about timing the market, but time in the market.

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We've booked a cottage for early July, and I'm already picturing the kind of trip where the days are pretty simple. Mornings outside with coffee, my daughter running around with our new puppy, afternoons by the lake, and those quiet evenings with my wife watching the sunset with a glass of wine after everyone else has gone to bed. And while we're away enjoying that time together, the timing also made me think about our own home back in Ottawa. Early July is such a busy time in this city, with Canada Day and Blues Fest bringing so many people in. That got me thinking about how our home could be put to good use while we're out of town as it's just sitting empty. Listing our home on Airbnb could create some extra income to help cover part of the trip,

while also letting another family enjoy our neighborhood during one of the best time to visit Ottawa. They could walk over to a local coffee shop, spend the afternoon at a nearby beach, and use our place as a comfortable home base after taking in everything happening downtown. Your home might be worth more than you think. Find out how much at Airbnb.ca. slash host. I responded to a post on X about somebody who effectively talked about this article and how it's just, yeah, the banks aren't in a bubble, whatever it may be. But if you actually read the article, he's not really saying they are. I don't know if he had a choice on what the title was,

but I would imagine what ended up happening is a lot of people seen this. They clicked it, hit a paywall. They couldn't read the article, so just kind of assumed it was a very bearish post on Canadian banks. It's really not. It's just kind of talking about how expensive they are. And again, I would tend to agree. So the one thing I would say is that,

market right now, I mean, I guess it's far from an absolute bank expert, but it seems to me like the market right now is pricing in continued declines in provisions, which if these banks continue to post like 30% declines in year-over-year provisions, it's hard to imagine they don't grow earnings at a 15, 20% pace because, you know, their Royal Bank is booking 500 million, four, 500 million less in provisions year-over-year. So that has to continue. I would say that would kind of be what would break this whole thing, is if provisions stopped decelerating at the pace they were,

because then obviously you have earnings don't grow as much. And these banks at 18x forward earnings are priced for very high earnings growth. I have been kind of a net seller of Canadian banks for the past couple of years, but it's really at the end of the year when I just kind of do a bit of rebalancing and I trim them back down. I don't really like the banks to be any more than five to seven percent of my portfolio. And right now they're kind of getting up there. So was I saying in the article that investors should consider taking profits is not saying to sell all of it. So I think that's an important nuance.

Taking profits. Sure, you can be taking profits and just liquidate all your positions. But you can also be taking profits and just do a bit like you. You rebalance. Maybe you trim 15, 20 percent. you take some profits that way. I think that's completely reasonable. And the other thing, I don't know if you mentioned it,

but he also said the underlying business of the bank, so the savings and loans, right, what banks are traditionally are. So I know you talked about the wealth management, the markets, you know, the investment banking side, all of that stuff, they're doing extremely well. But he also mentioned the article that the kind of traditional

or the base of the bank's business, those are not, not that they're doing poorly, but they're not growing very much. No, exactly. And this is not much different from the U.S., by the way. A lot of the banks, you know, the savings and loaning, it's not something that's growing all that much. And it probably is a reason why Osfiso, the Canadian regulator, actually lowered requirements. So in terms of the required capital that's required on the balance sheet, so in terms of the regulatory requirements say they're essentially encouraging banks to loan more so we'll have to see whether

that's a little bit of a reflection of what we're seeing with the banks right now yeah they had that situation where they kind of lowered the capital buffer but yeah the thing the thing about well it's kind of difficult because the thing is they don't need to loan the money they can buy back shares or raise dividends as well they're trying to encourage them but it's still up to the bank they're basically saying you have more than enough provisions or you know capital on your balance sheet to absorb losses, you should consider loaning more. But considering loaning more doesn't mean that they will. Yeah.

And buybacks at 17x earnings are probably not all that attractive to them right now because they would know, like these management teams probably know that they are very expensive right now. So you could see, yeah, like you said, they don't have to loan. They could easily just start increasing the dividend by double digits. That would probably be the situation that I would probably expect. But, I mean, if provisions continue to decline, I wouldn't be surprised if they didn't just continue to buy back a ton of shares. So on me trimming the banks, I mean, again, this is a situation where I was early, but I kind of had a strategy stuck to it. I'm pretty content with the results.

Again, it's not really detrimental for me because they don't make up a large portion of my portfolio anyway. Just on the article in general, I would not be rushed. out right now to sell Canadian banks, but I would probably not be adding to them. I have not added to them for a couple of years. I think if you're in a position where you're where you're very heavy Canadian banks, which is, I mean, let's just face it, is a ton of Canadian investors. I mean, just look at your portfolio. Ask yourself if that amount of exposure is reasonable to you. And if it is, I just don't really see why you'd be going out, rushing out to, to sell these companies. If you're over allocated, you say maybe I'm a bit too exposed. I mean, I don't

don't think there's any problem at all to taking profits. Reasonable level of exposure will ultimately vary wildly. It's all personal. I don't like having any more than 70%. When it gets high, I usually take a bit off the table. But I do know some people with very large portfolios as well that are 30 plus percent Canadian banks. So it all just kind of depends on you. But yeah, I feel I had to talk about this because I do think the situation is a lot of people hit the paywall and they kind of immediately assume that the article was super bearish. I mean, obviously, you put bubble in the title in Canadian banks. It is going to spark a lot of controversy, and I think that's kind of why they did it.

But the article is a very reasonable read. And I would suggest, you know, if you don't pay for the globe, kind of try to find a way to read this, whatever it may be through Apple News or whatever you said, you get it for free. Well, it's included with the News Plus subscription. So you have to believe be subscribed to News Plus, but you'll get it if you are. Yeah, and I had, you're allowed to give out gift articles, whatever it may be for Global Mail, so I got to read this one through a gift article. But yeah, it's a good article.

Yeah, and I think right now they have some promotions. Like, we don't have any, you know, we're not like they're not advertising or anything on the podcast. But yeah, affiliated. But I think you can get it for like 50 cents a week that I'm seeing here on the website for the first 24 weeks. So if that's interested to you, but if not, the article is much different than the title. That's a good takeaway. So let's move on here to the second segment. So I wanted to do a follow up on the bond episode like I talked about at the beginning here.

Got a comment regarding the bond episode. And I can't remember the name, but the listener asked if we could elaborate a bit more, if bonds still makes sense in a portfolio. And all approached this from a perspective of the asset class as a whole and not differentiate between bond ETFs and individual bonds too much. Because at the end of the day, there are some differences, but at the end of the day, your total returns will essentially be very similar. They'll just be a bit calculated in different ways.

So I'll use U.S. Treasury bonds here as the baseline because, let's be honest, Canadian government treasury bonds or corporate bonds will largely go in the same direction as the U.S. treasury bonds. For corporate bonds, there's going to be a credit spread between what U.S. treasuries are paying and corporate bonds in the aggregate are paying, and of course that will vary depending on the credit quality of the business and other variables as well. For the Canadian government bonds, there's other factors that will impact the price of Canadian government bonds, including projected economic growth, inflation expectation, overall demand versus supply for Canadian government bond.

But the U.S. yields will have a big impact. The reality is U.S. government bonds and the yield impact pretty much everything in the fixed income market. So I think it would be, I know we're Canadian, it's a Canadian investing podcast. We do look at, you know, Canadian topics, but it's when you just can't ignore the elephant in the room or the elephant down south, you just have to acknowledge it. And a quick note here is that technically anything that is 10 years or less should be called a treasury note or a treasury bill if it's less than one year, while 10 plus years is called a treasury bond. But for the purpose of this, I'll deviate a little bit here and just call anything that's five years or more treasury bonds.

So just so I don't get something in the comment, it's just easier to understand in terms of just trying not to get into too much the technicalities. There is an old saying in investing. It's not about timing the market, but time in the market. but time in the market. The most successful investors aren't usually the ones trying to catch every top and bottom. They're the ones who spend the most time in the market. I've been a quest trade user for over five years,

and the reason I stick with them is that they remove the friction of regular investing. With no commissions on stock and ETF trades, you don't have to wait until you have thousands of dollars saved up to make a move. You can contribute small amounts regularly and keep your portfolio growing consistently removing the stress of trying to time the market.

And they keep making it easier to build a well-rounded portfolio. Soon, you'll be able to trade precious metals through Questrade, giving you even more ways to diversify. Questrade makes the whole process seamless, allow you to focus on what really matters your investment strategy, not trying to avoid fees. Ready to invest? Head over to Questrade.com,

open and fund your account with code TCI, and receive $50. Conditions apply. We've booked a cottage for early July, and I'm already picturing the kind of trip where the days are pretty simple. Mornings outside with coffee, my daughter running around with our new puppy,

afternoons by the lake, and those quiet evenings with my wife watching the sunset with a glass of wine after everyone else has gone to bed. And while we're away enjoying that time together, the timing also made me think about our own home back in Ottawa. Early July is such a busy time in this city, with Canada Day and Blues Fest bringing so many people in. That got me thinking about how our home could be put to good use while I were out of town as it's just sitting empty.

Listing our home on Airbnb could create some extra income to help cover part of the trip while also letting another family enjoy our neighborhood during one of the best time to visit Ottawa. They could walk over to a local coffee shop, spend the afternoon at a nearby beach, and use our place as a comfortable home base after taking in everything happening downtown. Your home might be worth more than you think. Find out how much at Airbnb.ca slash hosts. So back to the question, Dan, do you think Bond still have a place in your portfolio? What's your quick answer on that? I mean, in my portfolio, certainly not, because I have, I mean, I'm in my mid-30s.

I don't know a lot of people who, even like retirees who own a lot of fixed income. It seems like for a very long time, I mean the 6040, whatever it may be was a very popular, you know, strategy. But bonds have kind of gotten destroyed by equities for a very long time to the point where I think a lot of people are kind of going sour on owning them. I don't know. It's very difficult. I mean, obviously if you're buying individual bonds, especially high quality, high grade bonds, I mean, you're not guaranteed, but you're, I mean, you're virtually guaranteed to get your money back. If you think about it, if you're buying a bond from, you know, a company like Enbridge or something like that,

there is a very, very low risk of default. So you're getting that coupon. You're getting, you know, your initial capital back. But most people don't go this route. They go the ETF route, which doesn't really under the surface, this is all happening. but it's not really the same thing that's happening in the in the ETF price. So, you know, you can be kind of underwater on a lot of those funds. But I don't know.

I don't really see the attractiveness of them. But it's also like we've kind of been blinded by like 20 years of very, very good market activity. Yeah. So I think my answer is a little bit more nuanced here. So first of all, I'm sharing for those looking at the video. So if you look, this is from the Federal Reserve. So really good chart. You can look it up yourself.

If you look, it goes back to 1977. So essentially looking at the 30-year U.S. bond yields, and bond yields peaked in the early, I guess early 1980s, they were yielding around 15%. And ever since then, essentially up until the spring summer of 2020, you were in a downward trend for bond yields. So the reason I want to mention that is because this was a huge tailwind for bondholders. During that period of time, it was really great to have a bond allocation in your portfolio. I mean, if you had a 60-40 bond allocation, so 60% equities, 40% bond, you did quite well.

You, of course, would have done better with just equities, but it still would have done quite well for you. And then when you start comparing, I did some really interesting charts here. So I'm just comparing this one here. So I did a chart. I compared TLT. So TLT is the 20, the I shares 20 plus years U.S. Treasury bond ETF. It was created in July of 2002.

So essentially I use a date when it was created up until July 20, July 2020, so July 22nd, 2020, because I figured it's like a 20-year period. And it's around the time that interest rates on the 30-year actually bottomed. People might think it bought it. later in 2020 when the Fed started raising rate. Well, that's the short end of the curve. If you're starting to look at longer duration bonds, they actually bought them in the spring or summer of 2020.

And if you look at the total returns in that 20-year period, so from 2002 to 2020, it did really good. Obviously, it did not do as good as the SMP 500, although during the COVID lockdown, the start, it was actually quite close in terms of returns. would have been almost like neck in neck in March of 2020. But during that period of time, the S&P 500 did 467% and TLT did 285. So you did really well.

And if you start looking here, and again, I'm using some U.S. data just because these are U.S. government bonds, but still pretty useful. And I did a little, they have a CPI calculator for the U.S. Bureau of Labor Statistics. and I used the same time frame to look at what $100 was worth back in July of 2002 to July of actually should have done 2020. So that would have been essentially $100. You had about 43% inflation during that period of time. So clearly some people might say, you know what?

That doesn't make sense. It should have, you know, the dollar lost more than half of its value. that's fine. You can debate all that all you want. Doesn't really matter. All that I wanted to show is that you, I think it's safe to assume that you actually increase your purchasing power. So your real rate of returns were positive. And I think that's really important here because it's not the same thing that happened in recent years. And if you're starting to look a little bit here at what happened in the last six years, Dan, do you want to take a little bet here of what happened? Crushed.

You got absolutely crushed. So if I take the same July 22nd, 2020 date up until today, so essentially six years to the date, so you lost in total return. So that includes a coupon payment. Again, using TLT, you lost 40%. So in real terms, if you factor in inflation, I don't know exactly how much loss, but I think it's safe to say that you probably lost 60% of your purchasing power. Not more. Well, and it would this would be, I mean, obviously it depends what account you hold them in, but this would be pre-tax

as well. So if you like compared to capital gains, obviously the S&P 500, you're getting some dividends, but the majority of your returns will come through capital appreciation and capital gains. If you held both these in a taxable account, it would be even worse because that interest income even though your bonds are losing value you're still paying interest income on that yeah but you could have you would have taken a loss right so you would have had a capital loss of

yeah you would have lost 50% of your capital so yeah I think yeah you would have been taxed on that for sure but at least you could offset the capital gains later on yeah but you couldn't offset that interest income tax with your capital loss no for sure so yeah it was

they're not very tax efficient that's the one thing so you do not like they it's the work it's effectively the worst form of investment income you can get would be interest income which is what these bonds pay so when you look at a post tax basis it it gets a little bit worse i mean it gets much worse but yeah like you had said you would have been able to book the the capital loss on the absolute wreckage of bonds through 2020 2020 to 2026 whatever it may be but it was pretty much solely from the rapid increase in interest rates. And that's why they did so well during the post-financial crisis kind of, because you had

mentioned how they started. You know, like essentially it was a structural trend. Like it happens over decades. It wasn't just the financial crisis. And that's what I wanted to show is like I think we're just, this is the other side of the coin where the last six year you got completely destroyed. And the other one I'm showing here on the chart is U.S. Treasury bills that are three months or less. So I just used a ticker BIL for the ETF, which during that six-year period, return 19%.

Why? Because there's little to no duration risk because they're constantly rolling over. And the other reason is that you've been getting between three and five percent, depending on when you bought them, obviously, during which time period in 2023, I think we were getting closer to 5%. And so if you held those, you actually did decently well. Did you keep up with inflation? Again, your real rates of return, probably not. I'd argue that inflation during those six years is well above 18% or 19% if you round up. Yeah, I mean, it was 9% a year there for a bit. It was pretty ugly.

But yeah, that's why they did so well pre-COVID. When you own these bonds and interest rates go down, obviously, the bond you own will have a higher coupon. on. So it will go up in value, whereas the complete inverse happened in 2022. You had kind of very low paying bonds, interest rates go up and your bonds kind of get wrecked. So I think the last six years has has kind of soured a lot of people on the whole fixed income situation. But like you had mentioned, it didn't really do all that bad free rapid inflation, which kind of shows you how, especially when you get to the longer duration of bonds, how much of a risk. inflation is to these inflation and interest rates to these longer term holdings. Yeah, exactly. And I mean,

like you, you kind of alluded to it. Like if you held like US treasuries specifically, you would have done pretty well during the financial crisis. So during short periods of time, you would have outperform stocks quite well during longer periods of times no, but you could have made a really good case during the last like three, four decades prior to 2020 that having that, you know, a 10, 20, 30, 40% bond allocation in your portfolio was a good balancing act between that, having that fixed income compared to having equities. But I think to me it all comes down. Can you at least match inflation? So if you, so I think that's really where the question is, whether deciding to have, you know, bonds in your portfolio or not. And again, I'm talking here, like longer

duration stuff so at least five years i would say for the most part and of course the longer the duration the more risk you're taking on so the term premium is greater because you have more uncertainty as to why what inflation is going to be so whether you're going to get if you're looking at right now the u.s. 30 year which is paying about 5.1 percent it might look pretty decent but 10 years down the line are you so sure that inflation will be 5 percent will it be high? or will it be lower? So you're taking, there's a lot of uncertainty involved with that. Of course, you can always go with the 10 year right now. That's paying 4.6%. So there's a little bit more visibility on what's happening in the next 10 years. But again, 10 years is a long time period.

And of course, if you own the individual bond, you could say, well, I'll just hold it to maturity. But that's where you get into an issue. If you're getting that 5% on the 30 year, but inflation is 6, 7% for the, on average, for that 30 year period. People might think, oh, you're crazy. Well, you don't know what's going to happen in 5, 6, 7, 8 years. So maybe we'll be in higher structural inflation. Same thing could happen with the 10 year.

Maybe it's paying 4.5% but inflation's closer to 5%. So you're seeing your real rates of return actually declining. And that's why we invest. We invest because we want to at least keep our purchasing power. but ideally increasing it. So at the end of the day, longer duration bonds, you really have to ask yourself, is it, you know, where will the economy be in 10 plus year from now?

How will inflation trend? How will deficit trend? How will the national debt trend? And of course, if you're investing into a company, you have some additional risk. You could have some credit risk with the company. With the governments, it's a bit different because, of course, they can always print money,

but the more money that you print, the more the fiscal situation, the more they spent, the more it gets out of control, the more inflation has a higher likelihood of increasing. So you're taking on that risk. So it's really a trade-off between, you know, trying to lock in that yield versus the risk that you're taking on the inflation side and the potential of just not matching that inflation because if you buy the individual bond, sure, you can get it to maturity, but that's the risk there. If you buy the bond fund like I just showed with TLT, then yes, you can sell whenever, but if you bought TLT in 2020 or 2019 and you sell now, you're looking at some pretty

steep losses even when you factor in the interest income that you got from that. So in terms of alternatives, I mean, at the end of the day, some might point to gold as a good alternative for hedging your portfolio against long-term inflation. It's hard to disagree with that, but as we saw, in the recent year, gold can also be pretty volatile in the shorter term. I think it's a good argument to make when you're looking at longer periods of time. But if you're looking to have something more stable in your portfolio, then I think a viable alternative is looking at shorter duration. Treasury bills or notes, so five years or less in duration.

Obviously, the shorter, the duration, the less risk that you have, you have more visibility on inflation in the short term. but you also will, you know, you'll get a bit less yield in terms of that. So that's one of the tradeoffs that you'll have. And right now, if the Fed starts cutting rates and, you know, in the next year, next year and a half, which I don't think is that far fetch, then, you know, are you getting paid two and a half, three percent versus inflation that might be running at three and a half, four percent? We'll have to see.

But then you're still looking at real rates of return that are below what inflation is and you're losing some purchasing power. So that is really the trade-off that you're doing is do you want to lock in that higher interest rate, but taking risk in terms of not knowing what the future will bring, especially so far in the future? Or are you happy with potentially undershooting inflation, but at least you don't have that duration risk and you have more liquidity up front? Yeah, and I guess the only thing I would mention here is the,

depending on what account they're in is the post-tax situation as well. Because even if you're earning, if you're earning four and a half percent, that inflation is even three percent post-tax, you're probably still negative on a real return basis. Because again, these are very tax inefficient, I guess you could say. But yeah, they're definitely not a hedge against inflation. They're kind of the reverse in that fact. Like if you get high inflation,

a lot of these longer-term bonds get hit. it very hard. Whereas if you go to the lower shorter term, there's so much roll over there that they don't really, they aren't really impacted in price all that much. That's why you see a lot of those like three to six month treasury bill ETFs, they barely move in price at all because they're just constantly rolling over into new ones. There's just not much impact there. But yeah. But you, it's basically a slow bleed, right? So that's the issue is that you lose, slowly lose purchasing power, whereas you have more of a risk when you go into the longer duration. But of course, you could have more upside as well.

Who knows, maybe the 30 year, you know, 10 years from now is yielding just 3%. And you've done pretty well when you bought it at 5, 5.1%. So it goes both ways. I just wanted to mention in terms of what I'm doing personally, well, I don't have bonds in my portfolio. I do have close to 10%, mostly in U.S. Treasury bills. The reason why I chose U.S. is they're yielding more than Canadian treasury bills right now. So that for me makes a whole lot of sense. Of course, you have to factor in currency exchange that can fluctuate, although I do think the U.S. dollar going forward has more of a probability of remaining relatively strong just because of what we're seeing the world and the constant demand for U.S. dollars.

And I do manage my parents' portfolio. They are retired. And for them, it's, you know, it's pretty simple. They have 15 to 20% in cash at all times, and the cash, the majority of it, again, is U.S. Treasury bills, three months or less. Something I am considering is looking at two years because the two year is usually a good gauge of where the markets thinks that rates will be going with the U.S. Fed. And the two year, I think, is zealing slightly above 4%. So the market is pricing in some potential rates increases, although I will be honest that I think the market is a little bit. wrong here. I don't think the Fed will be increasing rates. I think there's just, yeah, there's just

some forces that are making it very difficult for them because the U.S. is financing more and more with treasury bills and increasing rates which just means that the interest payments would be going up for the U.S. government. So I think that is going to be a big sticking point here. And I think they are ready to accept slightly higher inflation to make the debt more manageable in the years to come. So that's my thesis on that, but I am looking for my parents potentially buying some two years to bump up that yield a little bit. And if you want to see what I'm doing, I share this on joint tCI.com every 15th of the month, the moves that I do for their portfolio. And we share our own portfolios and the first of the month every single month. But that's what I'm thinking at right now.

But I think the biggest takeaways is for bond right now is that personally, I just don't think they are worth of risk when you go really far on the door. duration, of course. You can live at corporate bonds, but like I said, there are some other risks that you have to contend with when it comes to that. And I'd rather own shorter duration, even if it means I'll learn a bit less than inflation, because I think that's a lesser evil or a easier pill to swallow than taking the term risk. Yeah. And I mean, for me, I just have such a long way to go that I've never really considered holding them. I think if you have a long, time horizon. I think equities have historically proven to outperform fixed income, but I think as you get closer to retirement, it's something to consider. But I know a lot of retirees that have very

little interest in them, they mostly go the dividend stock route, which again is probably the result of a 15 plus constant bull market. So yeah, I don't plan on holding them anytime soon. But that's all I got for this. It was a pretty good segment. They're relatively mysterious to a lot of investors, even though they're very easy to purchase now with an ETF. But I find a lot of people you're told to own them as you get closer to retirement. But it all depends on your individual portfolio, what do you want to do with it, things like that. Yeah.

And just looking at the US to year bond yields. So we're recording in this on July 20th, and it is yielding 4.22. So it's actually, to me, that is quite attractive right now for fixed income because you, yeah, you don't have too much duration risk to contend with. And you're looking at a pretty decent yield, especially when you're looking, I think, 56th basis point lower for U.S. Treasury bills. So that, you know, speaking for my parents' portfolio, I think I will probably be adding a little bit of that.

I'm not saying you should do that for your portfolio. That's just what I'm doing for them. They are a very different situation than you even and I, are Dan, but I think maybe the biggest takeaway is it they could still have a place in your portfolio, but there is a lot of things to consider, I think, just before making, you know, a 60-40 plunge like used to be the, I guess the standard. Yeah, the go-to. I guess it really didn't matter. It's like 60-40 all the time. Didn't matter how far close you were from retirement. Well, I don't know. I've never really, I wasn't told when I was very young to go 60-40, but it was

Yeah, it was kind of the portfolio and it did very well. And then during, during COVID, I think it had like its worst stretch of results in history. It just got obliterated. But yeah, things change. Yeah, no, exactly. So I think that's a good way to end it here. Let us know what you thought about the episode. Again, this one will be posted on YouTube. So if you'd like to see the graphics that we shared, shared quite a bit when it comes to the banks and that'll all be on YouTube and of course, you know, if you just want income, you can always go buy the Canadian banks. Yeah. While yields are pretty low right now.

The yields are pretty low, so maybe you're better off buying some U.S. treasuries instead. How much are they yielding before we wrap this up? Oh, the banks are probably yielding on average, I would say, below 3% now. Oh, really? Wow. Okay. Let me try to find ZEDB's yield. 2.3% on ZEDB.

Oh, wow. Okay. is yeah. Very low. I mean, I think if we look to a company like Royal, that would probably one, yeah, 2.37% on Royal Bank. Wow. Which is well below what it usually pays. Yeah. Oh, that's crazy. I think the highest yield is probably Scotia right now and even that's only 3.7. Like when Scotia was doing rough, like it was yielding 6%, I think, pretty close to 6%. So, yeah, you're not getting much dividends from the Canadian banks right now, but you've also had a mountain of share price appreciation. So it works both ways.

Yeah. Okay. I think that's a good point to call it. If you own Canadian banks, congratulations. And for the rest of us, we'll just go cry in a corner. So thanks again for listening. We will be back with another episode on Thursday. The Canadian Investor Podcast should not be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.