Investors Rethink Strategies as Traditional Safe Havens Falter

Investors are grappling with a shifting financial landscape as traditional safe havens, such as government bonds, show increasing signs of instability. This change prompts a reevaluation of investment strategies. Martin Pelletier, a senior portfolio manager at Wellington-Altus Private Counsel Inc., shares insights into adapting investment approaches amidst these challenges.

Historically, bonds have provided a sense of security within investment portfolios. Yet, the current U.S. bond market is experiencing an unprecedented **62-month drawdown**, the longest in recorded history. Simultaneously, companies like **Microsoft Corp.** are witnessing their bonds trade at yields lower than those of U.S. Treasuries, indicating a growing lack of confidence in government credit quality.

The situation in Canada mirrors these concerns. The federal deficit is projected to exceed **$360 billion** between **2025 and 2028**, nearly tripling last year’s budget forecast. The **Parliamentary Budget Officer** has characterized this trajectory as “shocking” and “unsustainable,” noting that federal debt is expanding faster than the economy for the first time in three decades.

Despite cuts in federal jobs, government spending remains elevated, quickly approaching 2020 highs. The narrative of deficit spending being framed as “investing” may sound appealing, but it does not alter the fundamental financial realities. This issue is not exclusive to Canada; governments worldwide are increasingly disregarding fiscal constraints, leaving central banks to address the fallout.

The U.S. government recently entered its **11th shutdown** on **October 1, 2023**, affecting around **800,000 federal employees** and leaving another **700,000** working without pay. This shutdown has created a data vacuum that complicates the Federal Reserve’s ability to manage monetary policy effectively. Currently, the U.S. deficit hovers between **6% and 8%** of GDP, with interest payments consuming **14%** of the federal budget. The Treasury’s increasing reliance on short-term debt raises rollover risks in a climate of rising interest rates.

The evolving economic conditions signify a regime shift that necessitates adaptation from investors. As traditional safe havens lose their reliability, the gold market is already responding, with prices surpassing **US$4,000** an ounce last week. This surge serves as a warning signal, akin to a financial EKG, indicating potential risks ahead.

In light of these developments, Pelletier advocates for replacing traditional bond exposure with structured notes. Unlike corporate bonds, which are trading at credit spreads near **27-year lows**, structured notes offer asymmetrical payoff profiles, embedded downside protection, and the potential to generate income in volatile markets. These modern instruments are likened to the upgrades made to a classic car, enhancing both safety and performance.

Pelletier emphasizes that investors must evolve their portfolios beyond outdated strategies. Bonds, once considered the safety nets of investment portfolios, are increasingly vulnerable due to poor fiscal management and distorted monetary policies. The time has come not just for rebalancing, but for a comprehensive upgrade to investment strategies.

As fiscal discipline erodes and market signals flash warnings, innovative defensive strategies, including structured notes and gold, are becoming essential rather than optional. Investors are encouraged to rethink their approaches, ensuring their portfolios are equipped to navigate the complexities of the current financial landscape.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., which specializes in discretionary risk-managed portfolios and advanced wealth planning. The views expressed in this article do not necessarily reflect those of Wellington-Altus.