Suzanne M. Gaynor is expecting interest rates to go up later this year, so the long-time fixed-income specialist is taking a cautious approach to the bond market.
"The U.S. economy is improving, and the Federal Reserve has gone from emergency crisis measures, which it was forced to enact, to an accommodative stance, before they start tightening," says Gaynor, co-manager of the $7-billionRBC Monthly Income 
and vice-president at Toronto-based RBC Asset Management Inc.
The Fed is pleased about a growing economy, "but concerned about jobs," says Gaynor, noting that job losses have continued, albeit at a slower pace. "Until we see a recovery in jobs, rates will stay low."
In contrast, the picture is brighter in Canada and markets are anticipating rate hikes, says Gaynor. "About 100 basis points (bps) of tightening are priced in the market by the end of the year." (Bond prices and interest rates move in opposite directions.)
Gaynor, who oversees about $12 billion in fixed-income assets, admits to becoming somewhat defensive in terms of duration. "We have less short-term government of Canada bonds, and more corporate credits at the front end. That helps to keep the yield-to-maturity balance in the fund." The duration for the bond portion of the monthly income fund is 6.2 years, while it is 6.1 years for the $160-millionRBC Advisor Canadian Bond.
"As rates back up, short-term corporate bonds will handle that rate rise better because of the extra yield," says Gaynor. "They will cushion the impact of rising rates." Year-to-date, the benchmark DEX Universe Overall Bond Index is up around 1.5% and corporate bonds account for most of the gains.
"Government of Canada bonds are not doing you any favours," says Gaynor. "That's why we own more provincials, and corporate bonds, than the index. It's because of the extra yield." Gaynor has lowered the government of Canada exposure to about 40%, versus 50% in the index, and split the rest between corporate bonds and provincials.
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As part of a 15-person team, Gaynor gives credit to corporate-bond analysts in choosing securities. Last winter, she added names such as Citigroup Finance Canada Inc., whose bond was yielding 295 bps over Government of Canada bonds. It is now yielding 187 bps over government bonds, or 3.8%.
Born in Kingston, Jamaica, Gaynor has had an unconventional career path. Unlike many MBA-trained fund managers, she joined Royal Bank as a summer intern after high school. She never looked back.
Between 1981 and 1988, Gaynor worked in the bank's money-market department and then moved to the pension-fund and later the foreign-exchange department. In 1988, when the bank formed Royal Bank Investment Management Inc., (the predecessor of RBC Asset Management) Gaynor was one of the original employees. Over the next 12 years, she traded bonds.
Gaynor is proud of her ability to assess the economic environment and understand market risks. "You have to know when your trades should be small, or large. That's my background: trading fixed-income securities."
The process is comparable to completing a puzzle. "What are interest rates doing? What are the job numbers?" Gaynor says. "This job is about putting the pieces of the puzzle together."
Gaynor has been involved with managing RBC Advisor Canadian Bond since its inception in October 1999, and was appointed lead manager in December 2002. The 4-star rated fund is a core product and does not deviate much from the index.
"We have very little room on the duration band. Also, the maximum the fund can be overweight corporate bonds is 5%," says Gaynor. "But the flagship bond fund runs with about 60% corporate credits."
Gaynor is referring to the $4.8-billionRBC Bond , a 3-star rated fund which has been managed by a team since 2003, although her involvement stretches back to 1988.
In 2009, the fund benefitted from the corporate exposure and was in the top quartile. It returned 11%, versus 5.9% for the median fund in the Canadian Fixed Income category.
Since its inception in 1997, Gaynor has also been on the team that manages RBC Monthly Income. She has been co-manager since 2007 and shares duties with equity specialist Jennifer McClelland. (The 5-star rated fund has performed in the first quartile in the Canadian Neutral Balanced category on a three-, five, and 10-year basis.)
Looking ahead, Gaynor expects that the yield curve will flatten slightly, as the gap between the short and long-term bonds will narrow. "We will eventually move back to long-term averages," says Gaynor, noting that the gap between short-term and 10-year government treasuries may decline to 200 bps, from 350. "We are being cautious about higher rates," she says. "But we think (rate increases) will be measured."
