Fixed Income Monthly Monitor – December 2021
The FTSE Canada Universe Bond Index returned 0.87% on the month with the gains all coming in the final week of November. Yields were on the rise before stalling out and reversing course in a pronounced bull-flattening fashion. The intense risk-off period over the last few trading days of the month supported the bid for bonds as concerns related to the new variant spread and Omicron became a household name. The long-end handedly outperformed.
Growth and inflation implications came into focus. Any renewed restrictions and pull-back on travel because of the latest variant has made the growth trajectory murky, while supply chain bottlenecks and strong demand for goods has the potential to keep inflation elevated. With Canadian inflation clocking in at an uncomfortably high 4.7%, front end yields barely moved as expectations for rate hikes to commence are well entrenched. The question is how much of a damper will tightening financial conditions have on long-term potential growth?
Canadian 30-year and 10-year yields each declined about 25bps from their monthly peak to settle at 1.89% and 1.57%, respectively.
Credit in Focus
Canadian credit spreads have remained well contained for most of 2021, there have been few instances when corporate bonds have underperformed relative to governments. With spreads moving wider by about 8bps, on average, the sector underperformed in each maturity segment. Corporate spreads are now only a few bps from their YTD highs and at the same level at where they began the year. Energy and financials were two hardest hit sectors on the month.
Provincial bonds benefited from the shift to safer assets in November with positive returns across the curve. Provincials spreads widened as well, but moves were more muted than their corporate counterparts and mostly focused on weakness in the front end. Further out the curve was a good opportunity to move up in credit and generate incremental yield versus Government of Canada bonds. No surprise, energy producing province’s spreads underperformed with the pull-back in oil prices.