Fixed Income Monthly Monitor – June 2021

Market Update

The FTSE Canada Universe Bond Index returned 0.63% on the month. Since mid-March, the 10-year Government of Canada yield has struggled to find a catalyst to send it lower or higher. It has found resistance around 1.60% on the high-end and around 1.50% on the low end. The Canada 30-year yield, however, has been more active, trading in a 30bps range over the same period and topping out at 2.20% in mid-May.

Inflation is the 2021 story. We all knew it was coming and set expectations accordingly. However, annual inflation for April was robust, coming in above expectations on both sides of the border. US CPI was 4.2%, highest reading since September 2008, while Core PCE was 3.06%. The latter was the highest reading since July 1992. In Canada, CPI at 3.4%, was the highest since May 2011. Of note, the three Canadian core inflation measures (median, trimmed and common) are all close to the BoC’s 2% target but are rising. Inflation is here, the question is how long will it stay?

Credit in Focus

Corporate spreads were about 2 bps narrower on the month and have traded in a remarkably unwavering 16 bps range for the last five months. This despite investors having to sift through choppy economic data, employment misses, accelerated vaccine distributions, increasing inflation, a housing market boom, bond purchase tapering and more. There is a lot of data competing for air time to say the least. Corporate bond investors seem to be looking through the noise to the next phase of the recovery – which may have its own confluence of information to consume. Corporate returns were in line with governments, except for an underperformance in long term segment.

Provincial bond returns were up 1.02% on the month, with spreads narrower by 1-3 bps across the curve, on average. Provies outperformed corporates across each segment of the curve (except in line mid-term returns), with a notable outperformance of 0.59% in long-term bonds. The latter is where spreads tighten most, led by Alberta benefiting from the 9.5% rally in Western Canada Select (WCS) on the month.

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