Fixed Income Monthly Monitor – November 2022

Market Update

The FTSE Canada Universe Bond Index pulled back on the month, with a negative 1.0% return, which was an improvement from mid-month tracking. Canadian markets placed odds on the Bank of Canada raising rates another 75bps but were surprised by the down gear to 50bps. No surprise here, rates rallied across the curve on the news with 2-, 5, 10- and 30-year Canada yields all coming off their newly established cycle peaks in the month. Overall, yields were higher with the 10-year yields moving up 8bps to close the month at 3.25%. 

The Bank’s policy rate now stands at 3.75%. The Governing Council made clear that rates will still need to rise further to soften inflation, which continues to be public enemy number one. However, to signal that monetary policy is not on autopilot, the Bank’s projections have been downgraded with expected softness in business and consumer spending that is likely to result in the Canadian economy stalling over the next several quarters. Inflation is still a major problem, as core inflation has not slowed as much as the Bank would have hoped. However, they do see rate hikes taking bite and now forecast inflation to reduce its cruising speed to the high end of their 1% to 3% target by Q4-2023. 

Notably, there was no mention of the Canadian dollar, which has underperformed versus the US dollar on the lower than expected rate hike. A lower Canadian dollar works counter to the Bank’s inflation efforts as it weakens Canada’s terms of trade and increases the cost of imports. 

November started off with a shot of adrenaline. The US Fed raised rates 75 bps, as expected by market, however the market mover was Chair Powell’s press conference where he decidedly signaled a hawkish bias going forward. He indicated policy rates would likely need to rise further than previously communicated. Markets interpretation of his comments resulted in terminal expectations once again being recast, this time to above a 5% policy rate by Q1 2023. 

Credit in Focus

Corporate bond spreads resumed the prior month trend and were wider by 7 bps, on average. That brings the two-month cumulative widening to 22 bps, after performing relatively well through the summer months. REITs and Insurers were the underperformers on the month, with spreads decompressing by 21 and 17 bps, respectively. All-in corporate yields are now at levels last reached in January 2009. 

Provincial bond spreads moved directionally and proportionately with corporate spreads, as they were wider by 6 bps, on average. Widening was apparent across the entire provincial curve and issuers. Alberta was the best performer on the month while Ontario and Quebec underperformed. 

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