Bond yields in both Canada and the United States rose steadily in the first half of April, but then retraced most of their moves in the remainder of the month. Yields of 2 and 5-year Canada bonds finished only 1 basis point higher than month earlier levels, while 10 and 30-year bonds closed higher by 7 and 9 basis points, respectively. The shift in Canadian yields was very similar to the changes in U.S. Treasury yields during April.

Federal bonds returned -0.19% in April as higher yields resulted in lower bond prices. The provincial sector earned -0.32%, as its longer average duration resulted in bigger price declines despite yield spreads versus benchmark Canada bonds tightening by 3 basis points. Investment grade corporate bonds earned +0.30% in the month. Notwithstanding expectations of slower economic growth, demand for corporate bonds pushed their yield spreads tighter by 8 basis points. New issue supply was about average at $7.4 billion in the period. Non-investment grade issues responded to the equity markets’ strength and returned +0.63% in the period. Real Return Bonds earned +0.17% in the month as the rise in inflation spurred demand. Preferred shares earned +0.21% in the month.

Canadian economic growth has clearly slowed from the pace of mid-2018. This is not a surprise, however, as we had predicted the deceleration last October. We continue to believe that Canada will not fall into a recession this year, barring an unanticipated shock to the global economy. As a result, we believe the Bank of Canada will not be changing its trend-setting interest rates, either up or down, this year. The Bank will be in good company, as the U.S. Federal Reserve is unlikely to change its rates either.

We believe that as the Canadian economy continues to exhibit positive economic growth, the pessimism that pushed Canada bond yields below the Bank of Canada’s 1.75% overnight target will dissipate and yields will rise. Accordingly, we have positioned the portfolios defensively, with durations shorter than their respective benchmarks. We also believe that the yield differentials for bonds of different terms out to 10 years are too small. We have, therefore, structured the portfolios to benefit from a steepening of the yield curve. Our sector allocation strategy is maintaining a moderate overweight of the corporate sector, but we are looking to further improve overall credit quality given the current stage of the economic cycle.

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