Fixed Income   |   May 7, 2020

Out of Darkness Comes Light

The COVID-19 pandemic has been indeed the top story so far in 2020, but the oil price war between Saudi Arabia and Russia has also had a substantial impact on financial markets.

Jean-Guy Mérette
Vice President and Portfolio Manager, Fixed Income

Together, they’ve derailed the demand/supply equilibrium and driven oil prices down to levels never seen

Together, they’ve derailed the demand/supply equilibrium and driven oil prices down to levels never seen before – a dark backdrop for Canadian producers, who were already struggling with pipeline and transportation issues. Oil-producing provinces have also suffered, and Alberta, Saskatchewan and Newfoundland’s bond spreads have widened significantly as a result. As they did during the 2015 crash in crude prices, investors are pricing in higher budget deficits due to lower royalty revenue. Albertan bond spreads over comparable Ontario bonds went from went from -10 bps to +20 bps as the price of Western Canadian Select crude fell from $50 in May 2015 to $15 in February 2016. That same spread widened by more than 40 bps in March 2020 alone.

But here’s the light. The provincial bond purchasing program announced by the Bank of Canada a month ago will begin mid-May and will entail up to $50 B of provincial bond purchases in the primary and secondary markets, providing liquidity and helping provinces finance their budget deficits. This program will be allocated to each province based on their GDP, a measure on which Alberta ranks third in the country – the benefits won’t be as significant for Saskatchewan and Newfoundland, which have much smaller economies. Following the announcement, spreads between Alberta and Ontario bonds tightened about 20 bps, and we wouldn’t be surprised to see this trend continue, as Alberta is still, by far, the province with the lowest debt.

When these kind of market dislocations arise and investors are blinded by darkness, we prefer to build a position as the crisis evolves, and wait for the market to see the light.

 Jean-Guy Mérette

Vice President and Portfolio Manager
Active and Strategic Fixed Income Team

Disclosures

Related Insights

Fiera Capital Fixed Income Monthly Monitor Insight Image
Fixed Income
Jan 14, 2022

Fixed Income Monthly Monitor – January 2022

The FTSE Canada Universe Bond Index returned 1.67% on the month.
Q1 2022 Investment Outlook & Portfolio Strategy
Market Comment
Jan 12, 2022

Q1 2022 Investment Outlook & Portfolio Strategy

Read our latest quarterly Investment Outlook and Portfolio Strategy document, providing a financial market recap for Q4 and our outlook for the next 12-18 months.
Fiera Capital Private Wealth Canadian Yield Curve Overview Jean-Guy Mérette
Fixed Income
Mar 29, 2021
4:40

Canadian Yield Curve Overview

Description: Jean-Guy Mérette, Vice President and Portfolio Manager, Active and Strategic Fixed Income Team, talks about the Canadian yield curve, and shares the team's strategy to navigate this environment.
Jean-Guy Mérette
Vice President and Portfolio Manager, Fixed Income
Fiera Capital from the bond desk
Fixed Income
Feb 15, 2021

Is the Bond Market Getting Ahead of Itself?

The shape of the yield curve has changed significantly over the past six months.
Jean-Guy Mérette
Vice President and Portfolio Manager, Fixed Income