Globally, economic growth remained disappointing. In the Eurozone, unemployment declined to the lowest rate since 2011, but retail sales and industrial production were notably weaker than expected. As well, inflation at 0.2% remained worryingly close to deflation. At its January meeting, the European Central Bank acknowledged the poor rate of growth and indicated that additional stimulus could be forthcoming at its March meeting. That was supportive of Canadian bonds because either increased quantitative easing or more negative interest rates would make Canadian investments comparatively more attractive. In China, official statistics were little different from forecasts, including 2015 GDP growth of 6.9%. However, unofficial indicators such as the stock market and demand for commodities were weak and raised concerns that the world’s second-largest economy was, in fact, slowing significantly. Those concerns encouraged the flight-to-safety bid for North American bonds.

On the last trading day of the month, the Bank of Japan announced new monetary stimulus in the form of negative interest rates for banks leaving funds on deposit with the central bank. The Bank of Japan’s move was credited with causing a global stock market rally that day, but will likely have little impact on Japan’s economy for several reasons. First, the -0.10% rate on deposits will apply only to new ones made on February 1st or later, while existing deposits will earn an unchanged +0.10%. Second, the move caused the Yen to weaken in foreign exchange markets, which will raise import costs for Japanese consumers and depress discretionary spending. Third, negative interest rates in Europe have not resulted in the desired increase in bank lending and there is no reason that they will be more successful in Japan. And finally, the Bank of Japan did not increase its quantitative easing programme of buying government bonds. Nevertheless, as a result of the Bank of Japan’s move, the global total of government bonds trading with negative yields increased to an astonishing $5.5 trillion. By comparison, the positive yields of Canadian bonds seem attractive.

The Canadian yield curve flattened somewhat in the month as longer term yields declined more than shorter-term ones. The yields of 2 and 5-year benchmarks each closed 6 basis points lower on the month, while 30-year yields fell 12 basis points. The yield of 10-year Canada bonds fell the most, 18 basis points, which probably reflected foreign buying, especially through the futures market. The trajectory of Canadian bond yields followed most other markets, hitting lows on January 20th and then moving higher. In contrast, U.S. bond yields moved lower all month. The yield shift of U.S. bonds was significant with 5-year Treasury yields plunging 42 basis points and 30-year yields fell 27 basis points. Concerns about weaker global growth, particularly in China, led many observers to revise their expectations of future Federal Reserve rate increases to a slower pace, with the next move shifted to June from March. Slower Fed tightening would make bonds comparatively more attractive, hence the drop in yields.

The risk-off sentiment during January meant that the federal sector was the strongest sector. Federal bonds returned 0.91%, on average, fueled by the decline in yields and commensurate rise in prices. Provincial bonds returned only 0.14%, as yield spreads widened 10 basis points on average. The provinces most dependent on oil & gas revenues, Newfoundland, Alberta, and Saskatchewan, experienced the greatest deterioration as investors and rating agencies grew increasingly concerned as the price of oil plunged. Investment grade corporate bonds earned a minuscule 0.02%, because their yield spreads widened 15 basis points on average. Not surprisingly, energy company bonds were particularly weak, but other sectors, including NVCC-compliant bank debt, also widened significantly versus Canada benchmarks. In large part, the weakness in NVCC bank issues was caused by successive new issues from Royal Bank and CIBC that each repriced older, existing issues by about 15 basis points. High yield corporate bonds fared worse than investment grade issues in the risk-off environment, declining -2.11% in the month. Real Return Bonds declined -0.33% in the period, as interest in inflation protection waned with the plunge in oil prices.

1 2 3