Global bond markets, including that of Canada, were dominated in June by the run-up to and the aftermath from the British referendum to leave the European Union. The uncertainty regarding the impact of the negative referendum vote caused investors to buy sovereign government bonds as a safe haven. The yield of 10-year German Bunds, for example, fell below zero, ending the month at -0.13%, while 30-year U.S. Treasury yields closed at an all-time record low of 2.28%. Canada Bonds also benefitted from the flight to safety bid, as Canada’s AAA rating proved attractive to investors. The FTSE TMX Canada Bond Universe returned 1.77% in June, the best monthly result since January 2015.

The effect of Great Britain leaving the European Union, if it happens, will be felt most acutely in Britain. In addition to needing to renegotiate trade treaties with the E.U., the British economy will be hurt by businesses choosing to shift operations out of the U.K. to remain within the world’s largest trading bloc. The risks to the British economy were reflected in a sharp drop in the pound to the lowest level in over 30 years. British Pound, post-BrexitMany economists revised lower their expectations of British growth with a recession increasingly likely. In response, the Bank of England suggested additional monetary stimulus in the form of lower interest rates was likely. In the meantime, Standard & Poors and Fitch cut Britain’s rating from AAA to AA. Adding to the uncertainty were political considerations such as whether Scotland will choose to leave the U.K. in order to remain in the E.U., and the potential for some other members of the E.U. to also opt out. If the E.U. loses additional members that would raise the potential for increasing protectionism, which in turn would lead to lower global growth.

Canadian economic information received during June was generally positive, but received less attention than normal for two reasons. One was that much of the data was from April, and was considered stale in light of the impact of the wildfires near Fort McMurray during May. The second reason was that the British referendum dominated investors’ attention in the month, and domestic considerations took a back seat to Brexit. Among the good news that was mostly ignored was a drop in the unemployment rate from 7.1% to 6.9% in May. The impact of the wildfires was thought to have had minimal impact according to Statistics Canada because the population of Fort McMurray is only 2% of the population of Alberta. The Canadian exchange rate was little changed in the month, mirroring the price action of oil with which it is highly correlated.CAD vs Oil

American economic news was mixed in June. The unemployment rate fell to 4.7% from 5.0%, but most of the improvement came as a result of a drop in the participation rate. Job creation was significantly lower than in recent months. In addition to reducing hiring, businesses were also reluctant to invest in more plant and equipment as weak global demand and a plunge in energy sector spending lowered capital goods orders. On the positive side, consumer spending remained strong. The U.S. central bank, the Federal Reserve, left interest rates unchanged in June, but its accompanying statements were more dovish than anticipated leading investors to anticipate rates would stay lower for longer. The Fed’s dovishness helped support the bond market rally in the month.

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