Fixed Income Monthly Monitor – January 2022
The FTSE Canada Universe Bond Index returned 1.67% on the month. Even with the strong finish to the year, the index delivered a negative 2.54% return for 2021. This was the first negative calendar year return since 2013 and only the fourth since 1990.
Since the summer months, the market narrative transitioned from COVID spread concerns to a focus on high inflation and central banker’s reaction function. However, the Omicron variant and its implications on growth from additional restrictions, has reasserted itself. Pandemics eventually end, but this new variant complicated the question of when that will be. Benchmark Government of Canada yields fell across the board, with pronounced moves in long tenures. This led to a flattening of the yield curve and an outperformance in long bonds.
No surprises from Bank of Canada with early 2022 rate hikes in play, while the US Fed increased the pace of QE tapering, as expected. The US Fed however took a hawkish pivot given the high inflation and labour market progress, resulting in the market pricing in additional 2022 rate hikes.
Credit in Focus
Canadian credit spreads were under modest pressure as Government yields moved dramatically over the month, however they finished only 2 bps wider. Interestingly, corporate credit spreads are only a basis point off levels at the same point one year prior. The bias for the month was to move up in quality with Corporate A-rated outperforming in each maturity bucket. Within Corporate BBB-rated, pipelines and telecoms had the worst spread performance.
Provincial bonds benefited from the broader move in government yield curves where bull-flatteners led the charge. Performance in short- and mid- trailed corporates by just a few basis points, but handedly outperformed in the long-end. Spreads were modestly wider on the month, 1-2 bps, however, were narrower on the year, specifically in longer tenures. Alberta was the best performer, supported by the resurgence in oil prices.