Fixed Income Monthly Monitor – March 2022

Market Update

The FTSE Canada Universe Bond Index returned negative 0.7% on the month. Geopolitical tensions escalated with Russia’s invasion of Ukraine. The humanitarian crisis led to severe financial and economic sanctions aimed to weaken Russia, resulting in a deterioration in sentiment across financial assets. The initial financial market response was a flight-to-quality and heightened volatility. 

January was a clean hand-off early on with 10-year rates continuing to rise towards 2% and credit spreads grinding wider. In the last two-weeks of the month, rates reversed and end higher by 2-5 bps across most tenures in the flight-to-quality bid. This despite decades high inflation north and south of the border, as well as a surge in commodity prices, notably oil, in response to supply constraints from the impending sanctions. 

The impulse to inflationary pressures and potential drag on growth puts central bankers in a precarious situation after laying the groundwork for March lift-offs. Focus is expected to stay on persistently high inflation over the near-term, justifying a series of rate hikes, but this will be balanced against potentially weaker growth dynamics over the next several quarters. 

Credit in Focus

Canadian credit spreads widened 14 bps on the month as sentiment deteriorated across risk-assets in general. In prototypical risk-off response, lower quality credit underperformed across the curve, however, energy sector issuers fared-well given the direct benefits from rising oil prices. Average credit spreads are now about 40 bps wider since their tights in mid-November 2021. 

Provincial bond spreads, like corporates, were wider across the curve. Moves were most pronounced in longer tenures as GoC rates moved swiftly lower in the risk-off move. Alberta outperformed on rising commodity prices that are expected to significantly improve the province’s fiscal position, which initially included a more conservative oil price. Alberta spreads are now tighter than Ontario’s for the first time since 2018. 

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