Fixed Income Monthly Monitor – September 2021
Canadian Q2 GDP unexpectedly declined 1.1% (ann.) versus what many expected would be a 2% or better figure. The underwhelming report was largely due to revising growth figures lower in prior months. The print coincides with a period of third-wave restrictions and supply chain challenges that hampered production. Even with re-openings in full swing in July, the Stats-Can flash estimate was negative. With inflation rising and growth weaker, the BoC will have to fine tune their policy and communication.
The Jackson Hole speech from Chair Powell was not a market mover. However, Powel put effort in distinguishing between tapering bond purchases and raising policy rates – making clear there is not a fixed period between the end of QE and the first-rate hike, and policy developments will be dependent on the progress of the recovery.
The FTSE Canada Universe Bond Index return was relatively flat at -0.12% on the month. Yield curves steepened in a bearish fashion, with long-term yields rising by more than their short-term counterparts.
Credit in Focus
Corporate spreads were flat for the month, on average. Higher quality Banks, as well as the predominately BBB-rated sectors of Communications and Real Estate moved narrower, with all other sectors flat or modestly wider on the month. There was only about $4.3B of new issuance in August, the lowest supply for the month over the last six years. The pace of new issuance YTD is tracking about 4% higher than last year to the end of August.
Provincial bonds were modestly negative and underperformed corporates across the maturity spectrum on the month. All provinces saw spreads widen in the 10- and 30-year parts of the curve, with modest spread narrowing in the 5-year sector. Many of the provinces may see upsides to their fiscal position as updates are reported, as deficit estimates are likely to come in lower than estimated, albeit at elevated levels.