Dog Days of Summer

July 2023

As we move into the hot, humid, "dog days" of summer, we like to try and keep things light, airy, and cool. With respect to our monthly comments, this means more tables and graphs and fewer words! Below we present a summary of some key market moves in the Fixed Income space over the first half of the year (numbers are to June 30th).

Highlights:

  • Solid H1 total returns for broad Canadian (2.51%) and US bond markets (2.13%).
  • Corporate bonds meaningfully outperforming Government bonds on the back of constructive risk sentiment.
  • Lower rated corporate bonds outperforming higher rated corporates.
  • Continued upward pressure on shorter-dated government bond yields, less pressure further out the yield.
  • Thus, yield curves continued to flatten.
  • Risk premiums have recovered from the banking sector turmoil. Corporate bond spreads are now slightly tighter YTD. Tighter spreads and higher yield carry drive excess returns in the sector.
  • Inflation has moderated, but core measures remain persistently above central bank targets.
  • As a result, policy rate expectations have continued to rise.

Performance:

Total Return Performance 1-month 3-month YTD
Canadian Broad Bond market 0.04% -0.69% 2.51%
US Broad Bond Market -0.36% -0.82% 2.13%
Government of Canada -0.20% -1.44% 1.44%
US Government -0.73% -1.41% 1.63%
Canadian Universe IG Corporate 0.21% 0.18% 2.97%
US Universe IG Corporate 0.28% -0.21% 3.23%
US Universe HY Corporate 1.63% 1.63% 5.42%
Source: FTSE/Russell; ICE/BofA; Bloomberg

Chart 1:

Source: FTSE/Russell; Bloomberg

Government Bonds:

Table 1
Government Bond Yields 31-Mar 31-May 30-Jun MoM QoQ YTD
Government of Canada 2-year 3.74% 4.22% 4.59% 0.37% 0.85% 0.54%
Government of Canada 10-year 2.94% 3.19% 3.27% 0.08% 0.33% -0.03%
UST 2-year 4.03% 4.41% 4.90% 0.49% 0.87% 0.47%
UST 10-year 3.55% 3.65% 3.84% 0.19% 0.29% -0.04%
Source: Bloomberg
Table 2
Government Bond Yield Curve 31-Mar 31-May 30-Jun MoM QoQ YTD
Government of Canada 10-year minus 2-year -0.80% -1.03% -1.32% -0.29% -0.52% -0.57%
UST 10-year minus 2-year -0.48% -0.76% -1.06% -0.30% -0.58% -0.51%
Source: Bloomberg
Table 3
Government Bond Yield Spreads 31-Mar 31-May 30-Jun MoM QoQ YTD
Government of Canada 2-year minus UST 2-year -0.29% -0.19% -0.31% -0.12% -0.02% 0.07%
Government of Canada 10-year minus UST 10-year -0.61% -0.46% -0.57% -0.11% 0.04% 0.01%
Source: Bloomberg

Source: Bloomberg

Credit Risk Premiums:

Corporate Bond Yield Spreads 31-Mar 31-May 30-Jun MoM QoQ YTD
Canadian Universe IG Corporate 167 158 151 -7 -16 -11
US Universe IG Corporate 138 138 123 -15 -15 -7
Canadian Universe IG Corporate - US IG Corporate 29 20 28 8 -1 -4
US Universe HY Corporate 455 459 390 -69 -65 -79
US Universe HY minus US IG Corporate 317 321 267 -54 -50 -72
CDX IG 75.9 75.6 66.2 -9 -10 -16
Source: Bloomberg

Chart 3:

Source: Bloomberg

Chart 4:

Source: Bloomberg

Inflation:

North American Inflation 31-Mar 31-May 30-Jun MoM QoQ YTD
Canadian Core CPI YoY 4.50% 4.40% 4.00% -0.40% -0.50% -1.30%
US Core CPI YoY 5.60% 5.30% 4.80% -0.50% -0.80% -0.90%
Canadian Core CPI 6-month Annualized 4.23% 5.26% 5.60% 0.34% 1.37% 2.09%
US Core CPI 6-month Annualized 5.94% 6.38% 5.89% -0.49% -0.05% -0.56%
Source: Bloomberg

Chart 5:

Source: Bloomberg

Monetary Policy:

Monetary Policy Expectations 31-Mar 31-May 30-Jun MoM QoQ YTD
Canadian Terminal Policy Rate Expectations 4.47% 4.77% 5.09% 0.32% 0.62% 0.46%
US Terminal Policy Rate Expectations 4.96% 5.29% 5.41% 0.12% 0.45% 0.44%
Source: Bloomberg

Chart 6:

Source: Bloomberg

Rates positioning: (i) modestly short duration; (ii) yield curve flattener; (iii) overweight Cdn prime residential mortgages; (iv) overweigh RRB’s; (v) overweight Canada versus US but reducing position on opportunity.

Credit positioning: (i) overweight credit but reducing on opportunity; (ii) maintain a quality bias in favour of IG over HY, and more defensive credits within IG; (iii) overweight Cdn corporates, underweight US.

Fund Allocation
Dynamic Canadian
Bond Fund		 Dynamic Active Core
Bond Private Pool		 Dynamic Advantage
Bond Fund
Federal (Cdn) 11.6% 15.3% 13.3%
Real Return Bonds 1.6% 1.4% 13.3%
Provincial Bonds 26.2% 24.5% 14.7%
Corporate Bonds (Cdn) 56.8% 54.0% 32.4%
High Yield Bonds 0.6% 0.6% 18.6%
Duration 7.5 7.5 7.8
Source: Dynamic Funds, Jun. 30, 2023
Bond Yields (%) - Canada
2Yr 5Yr 10Yr 30Yr
Last year 3.01 2.96 3.08 3.04
Last month 4.21 3.42 3.16 3.10
23-Jun-23 4.66 3.76 3.36 3.20
04-Jul-23 4.66 3.77 3.34 3.13
Source: Bloomberg
Bond Yields (%) - US
2Yr 5Yr 10Yr 30Yr
Last year 2.82 2.82 2.81 3.04
Last month 4.34 3.70 3.60 3.81
23-Jun-23 4.74 3.99 3.73 3.81
15-Jun-23 4.94 4.19 3.85 3.86
Source: Bloomberg

Derek Amery

BA (Hons.), MA, CFA Vice President & Senior Portfolio Manager Fixed income investing

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