Fixed Income Monthly Monitor – August 2021
The FTSE Canada Universe Bond Index returned 1.03% on the month and continues to narrow the negative YTD performance of the index. Embracing duration has paid off for investors during this re-opening phase of the recovery.
Yields moved lower across the curve (bullish move), but whether the Government of Canada curve flattened or steepened is all about perspective. Short-term rates and the expected timing of the first rate hike barely budged, 30-year yields exhibited more stickiness, while 5- and 10-year yields declined just shy of 20 bps on the month. The latter was most reflective of the growth concern narrative that has prompted the most recent bond rally.
Bank of Canada tapered asset purchases by another $1B per week, which may signal they are on a quarterly tapering cadence as along as the incoming data is supportive. The US FOMC sounded more dovish, as expected. Acknowledging the US economy has made progress towards their objectives since December, but further labour market progress is required before tapering will commence.
Credit in Focus
Corporate spreads were about 2 bps, on average, wider on the month and have traded in a narrow range YTD. Spreads are about 3 bps tighter versus Dec 31 valuations. Corporate new issuance supply has been the counterbalance to the yield grab environment. July set a record for the month with $12.3B of supply coming to market. This puts 2021 corporate new issuances ahead of last year’s pace at the same point in time. Remember, 2020 was an all-time high for new issuance in Canada, as corporations raised cash on balance sheets and issued debt to take advantage of historically low borrowing costs.
Provincial bonds were the best performing sector on the month, again, owing to their longer average duration profile. Provincial spreads were modestly wider during the month, leading to some marginal underperformance versus Canadas in the mid- and long-term sectors, but they outperformed lower quality corporates across the curve.