Fixed Income Monthly Monitor – July 2021
The FTSE Canada Universe Bond Index returned 0.96% on the month. This marks the third consecutive month of positive performance following the Q1-2021 sell-off and reduces the market’s YTD loss to -3.46%
Longer duration assets were in favour, as they significantly outperformed relative to short- and mid-term bonds. The Government of Canada curved experienced its second significant repricing of the year resulting in a flatter profile. This is perhaps best expressed in the 30-year / 5-year yield differential. The first move was a bear-flattener, when 5-year rates priced higher in February following the BoC’s pivot to a more hawkish stance. The second, more recent shift, occurred in June via a bull-flattener, where 5year rates moved up slightly and 30-year rates fell perceptively.
Government of Canada 30-year yields have fallen almost 40 basis points (bps) since peaking at 2.20% in mid-May, while 10-year yields are down 20 bps over the same period. This has coincided with peak inflation levels and, in many instances, inflation figures have been higher than expected.
Credit in Focus
Corporate spreads were about 2 bps, on average, wider on the month. Interestingly, with all the changes undergone within government yield levels and curve shape, corporate spreads have barely budged. Spreads are only 1 bp narrow on the quarter and only 5 bps narrower on the year. Despite credit spreads being close to the lower end of their trading range, further narrowing may potentially be justified through a relative value lens, specifically given the lower Government yields. However, it has become increasingly difficult for credit spread outperformance as the rally has progressed.
Provincial bonds were the best performing sector on the month, owing to their longer average duration and the curve bull-flattening that provided a tailwind to the long end of the curve. Provincial spreads were modestly wider during the month, however, provincial spreads are tighter when compared to beginning of year. Corporate and provincial spreads have essentially the same bps narrowing year-to-date.