Winning Streak Continues

North American fixed income enjoyed their 5^th month “on the trot” (as my UK friends might say) of positive returns in September – their longest winning streak since late-2018/early-2019! Since the end of April, the broad Canadian bond market has generated total returns of 7.7%, rivalling the 8.3% return produced in Q4 of last year. The combination of continued moderation in inflation, signs of labour market softening, and a more aggressive start to the easing cycle from the US Federal Reserve have all contributed to the positive momentum. Further, the general positive sentiment towards risk has helped credit continue to outperform. So to say that North American fixed income markets are enjoying a “purple patch” (again, as my UK friends might) would be somewhat of an understatement! (Chart 1). For the month of September, the Canadian Universe Bond index was up 1.9%. Overall YTD and 1-year returns were 4.3% and 12.9% (that is not a typo!), respectively (Table 1). Similarly, the aggregate US bond market rose 1.2% MoM in September, pushing its 3-month gain to 5.2%. YTD and 1-year returns were 5.0% and 11.6% (again, not a typo!), respectively. That said, at the time of writing (Oct 21st), the Canadian and US bond markets are down 0.9% and 1.4%, respectively so far in October, so perhaps the good times are taking a breather, but that’s next month’s story. Investors are continuing to benefit from historically attractive yield levels with the aggregate Canadian and US bond markets yielding ~3.6% and 4.5%, respectively (again, at the time of writing). As mentioned, risk assets broadly have also enjoyed a strong run recently, despite some bouts of uncertainty and volatility. YTD (again, to the time of writing) the S&P 500, Dow Jones Industrial Average, and Nasdaq composite have rallied ~27.8%, 19.0%, and 28.4%, respectively. The S&P/TSX has lagged somewhat, with a YTD return (to Oct 21st) of ~18%. So, with returns in Canada and the US of approximately 13% and 19%, respectively, 60/40 balanced fund investors have had a very enjoyable 2024 thus far.

Chart 1:

Source: FTSE/Russell; Bloomberg

Over the month of September, YTD and 1-year, Canadian Federal bonds returned +1.5%, 3.7% and +11%, respectively, while the overall Universe Bond Index returned +1.9%%, 4.3% and +12.9%, respectively. Corporate bonds outperformed their government counterparts, returning +2.1% on the month. Further, with returns of +5.9% YTD and +14% over the past year, Canadian investment-grade corporate bonds have far outpaced government debt. Provincial bonds rose 2.1% on the month and have returned 4.7% YTD and +11% over the past year.

Market Review

Here is summary of market movements within both Rates and Credit over the course of the first 3 quarter of 2024:

Rates positioning: (i) Neutral duration; (ii) yield curve neutral; (iii) overweight Cdn prime residential mortgages; (iv) overweight RRBs; (v) overweight USTs.

Credit positioning: (i) overweight credit; (ii) maintain a quality bias in favour of IG over HY, and more defensive credits within IG; (iii) overweight Cdn corporates, underweight US.