The nascent recovery in “risk” assets that began in mid-February continued through March. The price of oil, which had been close to $26 on February 11th, climbed to over $41 per barrel by mid-March before consolidating to $38 at the end of the month. The S&P/TSX gained 5.3% in March, while the S&P 500 rose 6.8%. In the bond market, investors’ increased risk tolerance was reflected in a sharp narrowing of yield spreads for corporate bonds and somewhat narrower spreads for provincial issues, too. The safe haven bid for federal government bonds faded, resulting in modestly higher yields for Canada Bonds. However, additional monetary stimulus announced in Europe and Japan in the form of more deeply negative interest rates and increased quantitative easing put downward pressure on North American government bond yields, thereby keeping them from rising very much. Overall, strong returns in corporate and provincial bonds more than offset weak results in federal issues, with the broad market enjoying good results for March. The FTSE TMX Canada Universe Bond index returned 0.78% in the month. Canadian economic news was somewhat mixed, but on balance slightly positive. Economic (GDP) growth in the most recent month surprised to the upside and year-over-year growth was better than expected at +1.5%. Manufacturing sales and retail sales were both stronger than expected and, while the trade deficit was little changed, both exports and imports showed robust growth. Inflation fell to 1.4% from 2.0% a month earlier, due to base effects of large increases a year ago falling out of the calculation. Of some concern, the unemployment rate rose to 7.3% from 7.2%. However, large reported job losses in the education and health sectors seemed suspicious given the time of the year and suggested caution with regard to the labour data. The Bank of Canada left its trend-setting interest rates unchanged in advance of the federal budget later in the month. The federal budget did deliver the expected fiscal stimulus which should increase Canadian growth later in 2016 and in 2017. For bond investors, one of the key aspects of the budget was that Canada Bond issuance is expected to surge higher in the 2016-17 fiscal year. All things being equal, that should put upward pressure on bond yields. As well, there was no indication of when the budget would be balanced in the future.

Canadian economic news was somewhat mixed, but on balance slightly positive. Economic (GDP) growth in the most recent month surprised to the upside and year-over-year growth was better than expected at +1.5%. Manufacturing sales and retail sales were both stronger than expected and, while the trade deficit was little changed, both exports and imports showed robust growth. Inflation fell to 1.4% from 2.0% a month earlier, due to base effects of large increases a year ago falling out of the calculation. Of some concern, the unemployment rate rose to 7.3% from 7.2%. However, large reported job losses in the education and health sectors seemed suspicious given the time of the year and suggested caution with regard to the labour data. The Bank of Canada left its trend-setting interest rates unchanged in advance of the federal budget later in the month. The federal budget did deliver the expected fiscal stimulus which should increase Canadian growth later in 2016 and in 2017. For bond investors, one of the key aspects of the budget was that Canada Bond issuance is expected to surge higher in the 2016-17 fiscal year. All things being equal, that should put upward pressure on bond yields. As well, there was no indication of when the budget would be balanced in the future.

There were also both positive and negative aspects to U.S. economic data received in March. The unemployment rate held steady at 4.9%, as strong job creation was offset by a higher participation rate as discouraged workers returned to the labour force. Less positively, growth in average hourly earnings was weak and fewer hours were worked on average. Manufacturing surveys and construction spending were stronger than expected, but industrial production disappointed. Even the Fed gave conflicting signals, as a number of Fed officials hinted at a possible interest rate increase in April only to be contradicted by Chair Janet Yellen late in the month.Canadian and U.S. government bond yields rose in the first two weeks of March and declined over the balance of the month. Yields of benchmark Canada Bonds across all maturities rose between 1 and 5 basis points for the whole month. The increases in yields, though small, were sufficient to cause bond prices to fall by more than the interest earned and, as a result, the federal sector returned -0.06% in the period. Provincial yield spreads narrowed 11 basis points on average in March, which propelled that sector to return +1.03% in the month. The top performing major sector was investment-grade corporate bonds, which returned +1.59% in March. The change in risk tolerance led to bargain hunting by investors and corporate yield spreads narrowed 25 basis points on average. Banks accounted for more than 90% of the new issues in the month, with jumbo deposit notes from Royal Bank, T-D, and Bank of Montreal alone raising $5.5 billion. Non-investment grade corporates also benefitted from increased risk appetite, as they returned +3.09% in March. Real Return Bonds earned +2.06% as the increase in oil prices raised concerns of accelerating inflation. Preferred shares surged +9.32% in the month, as a dearth of new issues caused the prices of existing issues to be bid up.

Canadian and U.S. government bond yields rose in the first two weeks of March and declined over the balance of the month. Yields of benchmark Canada Bonds across all maturities rose between 1 and 5 basis points for the whole month. The increases in yields, though small, were sufficient to cause bond prices to fall by more than the interest earned and, as a result, the federal sector returned -0.06% in the period. Provincial yield spreads narrowed 11 basis points on average in March, which propelled that sector to return +1.03% in the month. The top performing major sector was investment-grade corporate bonds, which returned +1.59% in March. The change in risk tolerance led to bargain hunting by investors and corporate yield spreads narrowed 25 basis points on average. Banks accounted for more than 90% of the new issues in the month, with jumbo deposit notes from Royal Bank, T-D, and Bank of Montreal alone raising $5.5 billion. Non-investment grade corporates also benefitted from increased risk appetite, as they returned +3.09% in March. Real Return Bonds earned +2.06% as the increase in oil prices raised concerns of accelerating inflation. Preferred shares surged +9.32% in the month, as a dearth of new issues caused the prices of existing issues to be bid up.The speed of the rebound in the price of oil and riskier financial assets since mid-February seems unsustainable. Market prices rarely move in a straight line, and we do not think this time is any different. While cyclical lows may well have been set in February for a variety of instruments including equity prices, bond yields, preferred share prices and West Texas Intermediate, the path to higher levels is likely to be a bumpy one. The speed of the rebound that occurred more likely reflected the oversold condition of the markets and the need of

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