Fixed Income Monthly Monitor – October 2021

Market Update

The taper is coming. In what many expected to be the beginning of the end, the Fed signaled at the September FOMC meeting tapering could begin before year end. It was always contingent on “substantial further progress” within its dual price stability and maximum employment mandate. With inflation running hot, the committee acknowledge the threshold has been met. While employment has progressed, another strong couple of months of job growth may be what is needed to begin the asset purchases wind down process. 

Canada has also been experiencing hot inflation, with August CPI clocking in at 4.1% yoy, however growth has been less robust than expected by the Bank of Canada – it has contracted. The BoC has signaled their desire to wind down asset purchases as emergency policy tools are no longer necessary and for technical reasons. 

The FTSE Canada Universe Bond Index return was negative 1.40% on the month. Yield curves steepened in a bearish fashion, with rates rising across the curve. GoC 10-year yields finished the month 29 bps higher. 

Credit in Focus

Rising yields, faltering equity performance… corporate bond spreads move narrower. Canadian corporate bond spreads were 4 bps narrower, on average, for the month and continue to trade in a tight range that has been in place since the beginning of year. High beta and low beta sectors were all bid resulting in the corporate sector outperforming government bonds. Corporate BBB-rated sector outperformed within the composite with communications, energy and real estate spreads performing well. 

Provincial bonds were the worst performing broad-sector in the FTSE Canada Universe, as returns were dragged lower by rising long-term yields. The longer duration profile of the sector did not help despite provincial finances looking better than expected for the most part. Spreads narrowed across all provinces in short- and long-maturities, while mid-term bonds mixed. Alberta spreads outperformed as rising oil prices provided a tailwind for the province. 

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