Fixed Income Monthly Monitor – September 2022
The FTSE Canada Universe Bond Index dipped back into negative territory on the month, producing a return of negative 2.74%. June was a month of rising rates on inflationary concerns perhaps overshooting to the upside, July transitioned to growth concerns with rates overshooting to the downside and August ended with rates close to the mid-point of the two extremes.
The Government of Canada 2-year yield is the only tenor that managed to find a new peak on the month and is clearly most sensitive to changing guidance and expectations regarding terminal policy rates. 2-year yields were up 69 bps on the month and resulted in the significant 2’s/10’s inversion of about 50 bps. Front-end Canadian yields are now higher than the broader index.
North American central bankers were in full force priming the market for their upcoming policy announcements in September. The key message: higher rates are necessary and there is a likelihood rates will need to remain at terminal longer than the market is currently expecting to achieve their inflation targets over a reasonable period. Read: markets expectation for rate cuts in 2023 is premature and counter to policy objectives, inflation remains the primary concern of monetary policy. The coming months and quarters will shed light on just how much weakness central bankers will be willing tolerate on the growth and labour market fronts – when and if they begin to soften.
Credit in Focus
Canadian credit spreads tightened about 5 bps, on average, across the entire corporate complex and was out of step with the broader risk-off rally that unfolded on the month. Corporate bonds outperformed governments in each maturity bucket, with the BBB-rated corporates leading the way across the curve. This despite a month of negative equity performance. Improved valuations and the most attractive all-in corporate yields since 2009 have likely lent support.
Provincial bond spreads moved opposite corporates, with spreads wider across the curve, owing to their relative underperformance. Spread widening was most acute in mid- and long-term tenures with spreads moving 3-7 bps higher. Despite the recent fiscal improvement in Alberta, lower oil prices worked in the opposite direction this month, as the province’s longer term spreads were the worst performer in August.