The old proverb that “March comes in like a lion, goes out like a lamb” applied to the bond market this past month. In the first week of March bond prices plunged and yields moved sharply higher. The prices of 30-year Canada Bonds, for example, fell more than 6% in the first five days. Subsequently though, bond prices ground back, recovering much, if not all, of their earlier losses by the third week of the month. They then eased modestly into month end. The FTSE TMX Canada Universe returned -0.32% in the month.

During March, we learned that Canadian GDP grew at a +2.4% pace in the fourth quarter last year, which meant for all of 2014 Canadian GDP grew by 2.8%, thereby beating the U.S. GDP increase of 2.4%. Early indications of growth in 2015 have been somewhat slower, but have not been as weak as some observers feared. Indeed, during March, Bank of Canada Governor Stephen Poloz warned that Canadian growth would be “atrocious” in the first quarter. Yet, subsequent data showed that Canadian GDP declined less than expected in January. Unemployment rose to 6.8% from 6.6%, although the increase was due to increased numbers of workers entering the labour market rather than to rising job losses. Canadian inflation held steady at 1.0%, with core inflation also unchanged at 2.1%. Foreign demand for Canadian bonds was strong, as international investors purchased a record $9.2 billion of provincial bonds (half of which were issued outside of Canada). The Bank of Canada left interest rates unchanged and continued to try to justify its January-February policy flip-flop. In the end, investors seemed confused by the Bank of Canada’s actions and the central bank’s credibility eroded further.

U.S. economic data was mixed but, on balance, somewhat weaker that expectations. Retail sales, industrial production, and new vehicle sales were below forecasts and capacity utilization actually declined. As well, capital investment also appeared to have declined. More positively, unemployment fell to 5.5% from 5.7%, consumer sentiment was the most positive since 2004, and personal income growth was stronger than expected. Unfortunately, consumers seemed not to have started spending their savings from lower gasoline prices. Temporary factors such as severe winter weather, the recently resolved West Coast port strike, and the brief closure of two large truck plants for retooling by Ford were partially responsible for the disappointing data. So, it will take a month or two to determine whether underlying U.S. growth has indeed slowed, but the bond market reaction in March suggested that investors believed it had.

In the run up to the Federal Reserve’s March 18th rate-setting meeting, many observers focussed on whether the Fed would signal that a June rate increase was likely by removing wording in its statement that it was being “patient” about tightening monetary policy. In the end, the Fed did remove reference to being “patient”, but at the same time lowered its economic forecasts of growth implying that a June increase was, in fact, less likely than previously thought. As a result, the market consensus shifted from June to September as the most likely time for the first interest rate increase and that caused bond yields to decline and prices to move higher.

The European Central Bank commenced its quantitative easing programme of government bond purchases in early March. The impact was to push European government bond yields lower. The largest impact was on long term bonds, with 30-year yields falling 20 to 37 basis points, depending on the country. Short term yields, which were already very low, and in some cases negative, moved only slightly lower. Regardless of the term, declining European yields made North American bond yields look more attractive on a relative basis and that prompted international interest in Canadian and American bonds. The negotiations regarding Greece’s debt continued without conclusion and only a few headlines.

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