All Good Things ...

“All good things must come to an end” (a famous saying attributed to Geoffery Chaucer) certainly applies to North American fixed income markets so far in Q4. After enjoying their first 5^th month stretch of positive returns since late-2018/early-2019 from May through September, October and November have seen a quick shift in sentiment. After rallying 7.7% over that patch, the broad Canadian bond market gave back 1% in October (Chart 1) and at the time of writing, is down ~1.1% MTD in November. The fourth quarter pain-to-date has been even more pronounced south of the border, with the aggregate US bond market down ~0.5% so far in November after declining ~2.5% last month. Despite a more aggressive start to the easing cycle from the US Federal Reserve, market participants have tempered their enthusiasm over the magnitude of policy easing they expect over the next year. That, coupled with a resurgence of inflationary concerns following the results of the US election, have had North American bond markets on the back foot as we end toward year end. For the month of September, the Canadian Universe Bond index was down 1.0%. Overall YTD and 1-year returns were 3.2% and 11.3% (not a typo!), respectively (Table 1). Similarly, the aggregate US bond market fell 2.4% MoM in October, reducing its YTD and 1-year returns to 2.1% and 10.6% (again, not a typo!), respectively. With the notable backup in yields, investors are continuing to benefit from historically attractive yield levels with the aggregate Canadian and US bond markets yielding ~3.9% and 4.9%, respectively (at the time of writing). Risk assets broadly have enjoyed a strong run of late thanks to continued earnings growth and general positive risk sentiment buoyed by the Republican sweep. YTD (again, to the time of writing) the S&P 500, Dow Jones Industrial Average, and Nasdaq composite have rallied ~31.6%, 22.8%, and 33.3%, respectively. The S&P/TSX has lagged somewhat, with a YTD return (to Nov 21st) of ~21.1%. So, with returns in Canada and the US of approximately 14% and 20%, respectively, 60/40 balanced fund investors have had a truly enjoyable 2024 thus far.

Chart 1:

Source: FTSE/Russell; Bloomberg

Over the month of October, YTD and 1-year, Canadian Federal bonds returned -1.3%, +2.3% and +9.1%, respectively (Table 1), while the overall Universe Bond Index returned -1.0%, +3.2% and +11.3%, respectively. Corporate bonds outperformed their government counterparts, returning -0.5% on the month. Further, with returns of +5.4% YTD and +12.9% over the past year, Canadian investment-grade corporate bonds have far outpaced government debt. Provincial bonds fell 1.3% on the month and have returned 2.2% YTD and +12.6% over the past year.

COTM (Chart of the month)

Source: FTSE/Russell; ICE; Bloomberg

Government of Canada bonds have significantly outperformed their US Treasury counterparts thus far in 2024. In fact, as the COTM highlights, the divergence in yield levels has reached historic proportions, with Government of Canada yields trading more than 100 bps lower across the entire yield curve. This is the widest that spread has been based on data going back over 30 years! We believe that over the medium-term, this relationship is likely to normalize, with US government debt outperforming. Thus, we are looking to add to our US exposures on market opportunities.

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.