Fixed Income Monthly Monitor – May 2021
Relatively flat return for the FTSE Canada Index (0.06%) for such an action-packed month. The Federal Government released its first budget in two years and announced an additional $101B of stimulus to be spent over the next three years. More importantly for markets, the Debt Management Strategy indicated Government of Canada bond issuances will be tilted to longer maturities.
In the same week, Bank of Canada flipped the switch moving from cautious to hawkish in their outlook. Rates were held steady, while tapering purchases from $4B to $3B per week. They signaled the taper is appropriate given the economic strength, as opposed to a concern in owning too high a percent of Government of Canada bonds. There was also no adjustment to the purchase profile.
The US Fed didn’t change rates, the pace of asset purchases, or the forward guidance. They did however acknowledge the “strengthened” state of the economy, owing to “progress on vaccinations and strong policy support”. The Fed seems more confident on the progress in meeting their goals.
Credit in Focus
Corporate spreads ended the month 1-3 bps narrower, with demand filtering towards the Financial and Real Estate sectors. Energy, which had been one of the best YTD performers, took a pause for the month. Across each maturity segment, BBB-rated corporates outperformed versus it higher quality peers, which continues the high beta outperformance trend that has materialized since the beginning of the year.
Provincial bond returns were up 0.15% on the month, with results mixed across the curve. Short- and mid-term returns were up, while long-term provincials were modestly negative owing to the rise in long-term Government of Canada yields. Spreads however were 2-5 bps narrow across maturities and issuers leading to a sector outperformance relative to federals. Spread performance was strongest amongst the mid-western provinces of Alberta, Saskatchewan and Manitoba on the month.