Dog Days of Summer

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 30^th).

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:

Chart 1:

Source: FTSE/Russell; Bloomberg

Government Bonds:

Source: Bloomberg

Credit Risk Premiums:

Chart 3:

Source: Bloomberg

Chart 4:

Source: Bloomberg

Inflation:

Chart 5:

Source: Bloomberg

Monetary Policy:

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.