The federal sector returned 0.46% in June. The provincial sector was the top performing one in the month, earning 0.82%. the greater preponderance of provincial bonds are long term ones that enjoyed the largest declines in yields. Provincial yield spreads widened 5 basis points for short term issues but were unchanged for mid and long term issues. The Ontario election had negligible impact on the province’s bonds. The corporate sector returned 0.41% in the period. While new issue supply was relatively heavy at $11.4 billion, the risk of slower growth as a result of a trade war appeared to have a larger impact on corporate yield spreads, which widened by 3 basis points. Interestingly, floating rate issues were also in demand, with $4.9 billion of new supply being absorbed by the market. High yield issues returned only 0.18% in the modestly risk-averse environment. Preferred shares, on average, gained 0.29% in the month.

We believe that the Bank of Canada will likely raise its trendsetting interest rates by 25 basis points on July 11th. However, that may be the last increase this year as the Bank will need to evaluate the economic impact of the new tariffs and the uncertainty caused by the U.S. trade policies. In contrast, the Fed will probably increase its administered rates again at both its September and December meetings, because the U.S. economy is much less reliant on trade.

Bond yields should follow the lead of the central banks’ rate moves and move upward. Implicit in our forecast is an expectation that the flight-to-quality bid for bonds will dissipate. In particular, we remain cautiously optimistic that a full-blown trade war will not develop and cause an economic slowdown.

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