Barring a recession, we think it is very unlikely that the Bank of Canada will cut interest rates in the foreseeable future. Consequently, 2-year Canada bonds yielding less than the Bank of Canada’s overnight target rate of 1.00% appear expensive, and we prefer to hold money market securities rather than short term bonds. Further out the yield curve, we think there is the potential for additional steepening between 10 and 30-year maturities. The differential in yield between the two terms is about 60 basis points in Canada, which is relatively narrow compared to the U.S. at 120 basis points, Germany at 90 basis points, and the U.K. at 130 basis points. Accordingly, we are emphasizing issues closer to 10 years over 30-year alternatives.

From a sector perspective, we continue to favour corporates. However, we recognize that their yield spreads are no longer as compelling and we are being very selective about adding new positions. We have also reduced potential exposure to a housing correction by selling issuers that had most of their businesses tied to that sector. Should economic growth falter, we would look to reduce corporate holdings substantially.

On a final note, we are pleased to announce that our fixed income team has grown. Ian Clare has joined us as an analyst. Ian has more than 20 years of fixed income experience, which began at Bank of Montreal and includes experience at major pension plan managers. He has experience in both public and private fixed income credit markets.  This experience includes analyzing, trading, and managing both investment grade and non-investment grade fixed income portfolios. He has invested in investment grade and high yield bonds, leveraged loans and credit derivatives. Ian has a B.Comm. from the University of Toronto and a CFA designation.

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