Fixed Income Monthly Monitor – February 2022

Market Update

The FTSE Canada Universe Bond Index returned negative 3.40% on the month, which is the worst monthly return in almost 28 years. Rate hikes are coming, it’s the inevitable path forward, but how high and how fast have been left to market interpretation leading to unsympathetic moves in rates. 

As the calendar year changed, so too did rate expectations with Canada 10- and 30-year yields up about 30 bps by the end of the first week. The highly anticipated Bank of Canada meeting ended with policy rates unchanged, despite the Bank having all the justification they required to commence the normalization process – high inflation, capacity pressure, rising inflation and wage expectations, etc. However, they seized the opportunity to orderly shift from forward guidance to data dependency – and the outcome is that rate hikes will likely commence at the next meeting in March. 

The U.S. Fed committed to holding rates steady until asset purchases end. With the program set to wind-up in March, the market expects U.S. policy rates to step-up in the same month. The debate has shifted from a potential March hike to a potential 50 bps point hike come March. 

Credit in Focus

Canadian credit spreads moved higher, grinding slowly throughout the month to end 11 bps wider. After a well-contained trading range in 2021, spreads are now at their highest mark since November 2020. With financial conditions tightening and equity market volatility increasing there should be no surprise to some credit weakness. Corporate underperformance was concentrated in shorter maturities where spreads widen most. 

Provincial bond spreads, like corporates, were wider across the curve, with the most pronounced widening occurring in longer tenures. Provincials underperformed corporates by 1.2% in the long-term maturity category. Alberta, although spreads were wider, outperformed other provinces due to on-going support of higher oil prices and falling deficits. 

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