Pro Picks: 3 Corporate Bonds for Higher Inflation
Top investment ideas from Earl Davis at BMO Global Asset Management
WATCH: Earl Davis is optimistic—and that's rare for a bond investor. In this episode of In the Money with Amber Kanwar, the Head of Fixed Income at BMO Global Asset Management shares why he believes both the U.S. and Canadian economies are stronger than many think—and why fears of an imminent recession are overblown. However, he warns inflation isn’t heading back to 2% anytime soon, and instead may stabilize at a higher range of 4–5%.
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1. Fairfax Financial Holdings Ltd – FFHCN 4.73% 11/22/2034
Earl favors this investment-grade bond with a 4.73% coupon and a 115 basis point spread over the comparable government bond. Here’s why:
Proven Operational Strength: Fairfax, a property and casualty insurer, has earned three credit upgrades in three years, driven by $32 billion in annual gross premiums and a focus on operational excellence, ensuring resilience against risks.
Inflation-Beating Returns: The 4.73% coupon exceeds inflation, delivering a real return that preserves purchasing power at maturity.
Reduced Default Risk: Credit upgrades reflect Fairfax’s strong capitalization and robust business model, minimizing the risk of default for bondholders.
2. Enbridge – 3.1% 09/21/33
This investment-grade bond with a 3.1% coupon and 2033 maturity is a safer play in Earl’s portfolio. Here’s why he likes it:
Global Revenue Stability: Enbridge’s diversified operations, with over 50% of revenue from North America, provide a stable foundation across global markets.
Record Financial Performance: Recent record profits underscore Enbridge’s ability to reliably meet coupon payments and maintain financial health.
Infrastructure Advantage: Positioned to benefit from Canada’s infrastructure expansion and commodity growth, Enbridge is well-placed to support its bond obligations.
3. Top Aces – TOPACE 9% 03/13/30 (B Rated, High Yield)
Earl’s high-yield pick, Top Aces’ 9% coupon bond (550 basis points over the 5-year government bond), offers bold returns. Here’s why it’s compelling:
Thriving Defense Sector: Top Aces, a Canadian leader in fighter jet simulation, operates in the growing defense industry, training pilots cost-effectively in Canada, the US, and Germany.
Revenue Growth Potential: The company’s expanding revenue in a high-demand sector supports its ability to manage high-yield debt, mitigating payment risks.
Rigorous Vetting Process: Beimo’s credit analysts conducted in-depth due diligence, including management discussions, to confirm Top Aces’ capacity to meet debt obligations.