Fixed Income Monthly Monitor – May 2022

Market Update

The FTSE Canada Universe Bond Index returned negative 3.49% on the month, continuing its slide as rates across the curve reset to a higher plateau. With rates moving higher and credit spreads moving wider YTD, the index is down 10.2% over the period. Returns have beat the S&P500 Index with an almost negative 12% return, while the S&P/TSX Composite Index has fared better down only 1.3% over the period. 

Bank of Canada delivered an upsized rate hike on April 13^th, moving its Overnight Lending Rate by 0.5% to 1.0%. This was the Bank’s largest rate hike since May 2000. The Bank has also commenced winding down the size of its balance sheet by allowing bonds to mature and ceasing purchases at auction and in the secondary market. US Fed had the market set for a similar change in policy for their early May FOMC meeting. 

Canada and US headline inflation reached 6.7% and 8.5%, respectively. With inflation elevated, labour markets tight and commodity prices rising central bankers have made clear their intention is to raise rates expeditiously towards neutral to regain price stability. As central bankers seek to engineer a ‘soft landing’ there are growing concerns on how much economic growth will slow as financial conditions tighten. Canada 10-year bond yield moved up 46 bps on the month to 2.87%. 

Credit in Focus

Canadian credit spreads widened 16 bps, on average. Every sector had double-digit pull-backs on the month, with Financials as the laggard at 19 bps widening across the sector. Within Financials, Banks were the worst performers, as has been the case for most of 2022, given the elevated Bank supply that has come to market. Thus far in 2022, YTD, CAD Bank issuance has surpassed issuance for all of 2021. From a total return perspective, BBB-rated corporates outperformed A-rated in each maturity category. Corporate spreads have now widened by 42 bps in 2022 and by 53 bps dating back to their lows in mid-November. 

Provincial spreads were wider by about 3-4 bps in 10 years or less maturities, and about 5-8 bps in longer maturities. Provincial budget season was relatively positive, with almost all provinces reporting better than expected growth and revenues, as well as improved outlooks for deficits. The one exception is Ontario that is projecting a larger fiscal deficit in the upcoming fiscal year compared to the previous. 

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