Canadian bonds were little changed in February following seesaw price action. In the first half of the month, bond prices corrected from the levels reached during the strong January rally and yields rose as investors discounted weaker than expected economic data that was thought due to severe winter weather. In the second half of the month, investors were less certain that winter storms were the sole cause for slower growth and bonds retraced their earlier losses. In addition, the geopolitical uncertainty regarding Ukraine caused a flight-to-safety bid to develop for bonds. The FTSE TMX Canada Universe Bond index (formerly the DEX Universe Bond index) returned 0.35% in the month.Canada 10 year yield

Canadian economic data received in February tended to disappoint. Factory sales fell 0.9%, as 15 of 21 industry sectors experienced declines. As well, retail sales during December were much weaker than expected, primarily due to the ice storm in Eastern Canada the week prior to Christmas. The monthly trade deficit deteriorated as imports increased faster than exports. Housing starts also declined more than forecasts. One of the few positive developments in February was a decline in the Canadian unemployment rate to 7.0% from 7.2%, which was caused by a combination of good job creation and a lower participation rate.

In the United States, the economic news was almost exclusively worse than economists’ forecasts. The recovery in the critical housing sector stuttered as starts slumped 16% in a month, existing home sales were weaker than expected, and homebuilder confidence fell sharply. Industrial production fell as a 0.8% fall in manufacturing output was only partially offset by a surge in utility production to meet increased demand for heating during the severe weather. Retail sales were weaker than expected, as were light vehicle sales. In addition, the estimate of fourth quarter 2013 growth in GDP was lowered from 3.2% to 2.4%, suggesting less momentum heading into the current quarter. Even the positive news that the unemployment rate fell to 6.6% from 6.7% a month earlier was diminished by weaker than expected job creation.

The decline in yields during the second half of February nearly matched the rise during the first half of the month and, as a result, yields were little changed. Yields on 2 and 30-year Canada bonds rose a few basis points, while mid-term Canada Bond yields declined slightly. The mixed movements in yields meant there were negligible price gains for federal bonds, with that sector earning only 0.15% in the month. Provincial bonds earned 0.52% in February, as they benefitted from longer term yield spreads narrowing by 3 basis points, thereby generating better price performance versus federal issues. Corporate yields spreads also narrowed by 3 basis points, but the lower duration of that sector resulted in smaller gains than for provincial bonds, with corporate bonds returning 0.42%. New corporate issues totaled $7.1 billion in February. While it was still early days, on a year-to-date basis, new issues were trailing last year’s pace by 19% and investor demand for corporate bonds remained strong. High yield bonds returned 1.34%, as relatively few new issues combined with seasonal RRSP demand caused some tightening of yield spreads. Real Return Bonds gained 0.73% in February.

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