A Winning Streak for Bond Markets

July 2024

Back-to-back monthly gains have been tough to come by in North American fixed income market so far in 2024. But on the back of their best month of the year in May (Canadian Universe index was up 1.8%), bond markets followed that up with another solid performance in June – marking the first two month winning streak of 2024! (Chart 1) In fact, at the halfway point, the Canadian bond market was almost back to flat year-to-date. The broad Canadian bond market returned 1.13% in June, dragging the YTD return up to -0.38%. Similarly, the aggregate US bond market rose 0.96% MoM, improving its 2024 performance to -0.47% (Table 1). On an ongoing positive note, despite the recent decline in yields, investors continuing to benefit from historically attractive yield levels with the aggregate Canadian and US bond markets yielding ~4.2% and 4.8%, respectively. Risk assets enjoyed another strong month with many of the major indices testing record levels. The S&P 500 rose ~3.5% on the month and is up ~15.3% YTD. To top that, the Nasdaq composite jumped ~6% in June, pushing its YTD gain to ~18.5%, while the Dow Jones Industrial Average gained ~1.2% MoM and is up 4.8% YTD. The S&P/TSX trailed its US counterparts, falling ~1.4% on the month, bringing its YTD return down to ~6.1%.

Chart 1:

Source: FTSE/Russell; Bloomberg

Over the month, YTD and 1-year, Canadian Federal bonds returned +1.03%, -0.37% and +3.14%, respectively, while the overall Universe Bond Index returned +1.13%%, -0.38% and +3.69%, respectively. Corporate bonds underperformed their government counterparts for the first time since October 2023 in June, returning +0.96% on the month. Yet with returns of +1.16% YTD and +6.46% over the past year, corporate bonds have far outpaced government debt. Provincial bonds rose 1.35% on the month and have returned -1.50% YTD and +2.3% over the past year – outperforming on the month due to their longer average term-to-maturity in a falling yield environment. Conversely, over the past year the rise in bond yields have been a relative headwind for provincial debt.

Table 1:
Total Return Performance 1-month 3-month YTD YoY
Canadian Broad Bond market 1.13% 0.86% -0.38% 3.69%
US Broad Bond Market 0.96% 0.19% -0.47% 2.71%
Government of Canada 1.03% 0.80% -0.37% 3.14%
US Government 1.03% 0.12% -0.82% 1.36%
Canadian Universe IG Corporate 0.96% 1.09% 1.16% 6.46%
US Universe IG Corporate 0.64% 0.12% 0.04% 5.04%
US Universe HY Corporate 0.97% 1.09% 2.62% 10.45%
Source: FTSE/Russell; ICE; Bloomberg

The heat of the summer, we like to try and keep things light and simple. Thus, for a mid-year review, we will let the numbers do the talking.

Rates Markets

Table 2
Government Bond Yields 31-Dec 30-Jun MoM QoQ YTD
Government of Canada 2-year 3.89% 4.00% -0.19% -0.18% 0.11%
Government of Canada 10-year 3.11% 3.50% -0.13% 0.03% 0.39%
UST 2-year 4.25% 4.76% -0.12% 0.13% 0.50%
UST 10-year 3.88% 4.40% -0.10% 0.20% 0.52%
Source: FTSE/Russel/Bloomberg
Table 3
Government Bond Yield Curve 31-Dec 30-Jun MoM QoQ YTD
Government of Canada 10-year minus 2-year -0.78% -0.49% 0.06% 0.22% 0.29%
UST 10-year minus 2-year -0.37% -0.36% 0.02% 0.06% 0.01%
Source: FTSE/Russel/Bloomberg
Table 4
North American Inflation 31-Dec 30-Jun MoM QoQ YTD
Canadian Core CPI YoY 3.50% 2.90% 0.20% 0.10% -0.60%
US Core CPI YoY 4.00% 3.30% -0.10% -0.50% -0.70%
Canadian Core CPI 6-month Annualized 3.63% 4.10% 1.45% 2.49% 0.47%
US Core CPI 6-month Annualized 3.92% 4.53% -0.47% -0.49% 0.61%
Source: Bloomberg
Table 5
Monetary Policy Expectations 31-Dec 30-Jun MoM QoQ YTD
Canadian Policy Rate Expectations - 1yr Forward 3.72% 4.31% -0.17% 0.03% 0.59%
US Policy Rate Expectations - 1yr Forward 3.59% 4.76% -0.12% 0.29% 1.17%
Source: FTSE/Russel/Bloomberg

Rates positioning: (i) Neutral duration; (ii) yield curve neutral; (iii) overweight Cdn prime residential mortgages; (iv) overweight RRBs; (v) overweight USTs.

Credit Markets

Table 6
Corporate Bond Yield Spreads 31-Dec 30-Jun MoM QoQ YTD
Canadian Universe IG Corporate 134 122 4 2 -12
US Universe IG Corporate 99 94 9 4 -5
Canadian Universe IG Corporate - US IG Corporate 35 28 -5 -2 -7
US Universe HY Corporate 323 309 1 10 -14
US Universe HY minus US IG Corporate 224 215 -8 6 -9
CDX IG 56.7 53.5 5 2 -3
Canadian IG Excess Return 0.81% -0.10% -0.10% 0.31% 1.46%
US IG Excess Return 0.31% -0.49% -0.49% 0.13% 1.16%
Source: FTSE/Russel/Bloomberg

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

Bond Yields (%) - Canada
2Yr 5Yr 10Yr 30Yr
Last year 4.59 3.69 3.27 3.09
Last month 4.32 3.82 3.76 3.62
2-Jul-24 4.04 3.60 3.62 3.52
Source: Bloomberg
Bond Yields (%) - US
2Yr 5Yr 10Yr 30Yr
Last year 4.94 4.19 3.85 3.86
Last month 4.97 4.63 4.61 4.73
2-Jul-24 4.73 4.40 4.45 4.63
Source: Bloomberg

Derek Amery

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

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