Fixed Income Monthly Monitor – June 2022
The FTSE Canada Universe Bond Index returned negative 0.07% on the month. Yields were modestly higher, 2-5bps, across the Government of Canada curve, while provincial, municipal and corporate bond spreads have widened.
Yields were on an upward trend into May but peaked early in the month. The 10-year yield reached 3.13% before settling at 2.89% ahead of the Bank of Canada’s policy announcement. The BoC delivered on the fully expected 50bps hike on June 1 and maintained their hawkish rhetoric on policy. With decades high inflation and a still solid economic backdrop, 50bps moves is likely at least the cadence over the next few meetings.
A key focus for the market is whether the current pace (50bps) of Fed and BoC tightening will be enough to meaningfully decelerate inflation over a reasonable time. Additionally, at what point does tighter financial conditions, high inflation and higher policy rates short-circuit real economic growth leading to deeper than expected weakness? At the moment, equities and credit are more likely reflecting higher rates and deteriorating sentiment, meaning there is likely more volatility ahead should recession concerns escalate over the next several quarters.
Credit in Focus
Canadian credit spreads widened another 10 bps, on average, bringing the YTD widening to 52bps. Corporate bonds in general underperformed government bonds across all maturity segments in a month marked by corporate weakness. Every sector was wider with the most pronounce weakness in the financial sector yet again. Last month we highlighted the elevated YTD Bank supply that has come to market, which has resulted in Banking sub-sector spreads, on aggregate, backing up by the second most despite the higher quality short duration profile.
Provincial spreads were wider by a more modest 1-3 bps across the curve compared to their corporate counterparts. Alberta has clearly benefited from another surge in oil prices, resulting in an upgrade to their credit rating outlook on an improved fiscal position and a housing market with less froth than most of Canada.