Canadian pension fund increases exposure to bonds

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Canadian pension fund increases exposure to bonds

One of Canada's largest pension funds is boosting its exposure to bonds, citing attractive yields after the worst selloff in a generation.

The Ontario Teachers Pension Plan is increasing its holdings of inflation-protected debt, along with some investment-grade and junk notes, said Jo Taylor, president and chief executive officer of the fund that manages C $243 billion $177 billion, after it slashed bonds last year in favor of infrastructure and property investments to hedge against inflation.

What do people think about bonds? Taylor said in an interview from the Singapore office that the fund is getting more attractive. We will probably increase our allocation to fixed income a bit, but we are still very lightly allocated compared to what we might have been given in the type of plan that we are. A growing number of investors are picking up bonds, with Citigroup Inc. s Steven Wieting and JPMorgan Asset Management drawn by attractive valuations and growing bets for an economic downturn. The Federal Reserve s taming inflation makes these wagers a precarious proposition, as another wave of aggressive tightening may cause more losses for fixed-income assets.

The Toronto-based firm cut its exposure to bonds to just 14% of assets last year, before increasing it to 18% in June. Taylor is not happy with the gyrations over the last couple of years and is reluctant to call a bottom in the market.

A Bloomberg gauge of investment-grade debt has dropped about 20% this year, while 10 year Treasury yields have gone up more than 210 basis points to head for their biggest annual increase since 1962, according to data compiled by Bloomberg. The Fed s aggressive rate hikes have resulted in a drop, and even inflation-protected debt has suffered, with a Bloomberg index tracking the securities from 12 markets showing a 26% loss in 2022.

The rise in yield curves has resulted in an inversion in yield curves, with investors betting that a recession will follow to the cuts in policy rates.

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Ontario Teachers are going to shift into longer-term bonds after earlier seeking refuge in shorter-duration debt to better cope with the surge in borrowing costs.

He said that Australian government bonds yielded 4% to 5%, which is why we are picking to have longer-duration bonds.

Corporate bonds are appealing and the fund is building up junk-bond teams in Toronto and London to increase its exposure there.

Ontario Teachers plans to increase its exposure outside North America by investing 50% of its new investments in Europe and Asia. With new offices in Singapore and Mumbai, the fund wants to extend its Asian exposure beyond China, which is struggling with slower growth, an aging population and a real-estate market crisis.

He said that China is a good reinforcement of what we are seeing more broadly, which is that we are at a point of change. Whatever has been working for the last 15 years probably won't work for the next five. The fund does not plan to increase its exposure to private equity, which accounts for about 23% of its assets, Taylor said. In the first half of 2022, the fund posted a net return of 1.2%, even as most global assets fell.

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