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 short sellers to cover their positions than a major shift in fundamentals. Further recovery will be slower and uneven.For bond investors, the outlook is complicated by the negative interest rates in Europe and Japan that have resulted from

For bond investors, the outlook is complicated by the negative interest rates in Europe and Japan that have resulted from excessive monetary stimulus. With sovereign governments still trying to regain control of their fiscal deficits through austerity, central bankers have been trying in vain to encourage economic growth by lowering their administered rates further and further below zero. While they claim circumstances would have been worse had they not used negative interest rates, there is scant evidence that negative rates actually improved economic growth. What is clear is that European and Japanese investors have been significant buyers of North American bonds because they offer positive rather than negative yields. As a consequence, bond yields in both Canada and the United States have been pushed lower than domestic circumstances would warrant.We believe that U.S. yields have the greatest likelihood of moving higher, because the Federal Reserve has started a gradual tightening process. Should U.S. yields indeed move higher, we believe that longer term Canadian yields would follow. Shorter term Canadian yields are less likely to move higher, given the Bank of Canada’ relatively recent rate reductions. We are maintaining portfolio durations a little shorter than respective benchmarks.

We believe that U.S. yields have the greatest likelihood of moving higher, because the Federal Reserve has started a gradual tightening process. Should U.S. yields indeed move higher, we believe that longer term Canadian yields would follow. Shorter term Canadian yields are less likely to move higher, given the Bank of Canada’ relatively recent rate reductions. We are maintaining portfolio durations a little shorter than respective benchmarks.Even with the recent narrowing of yield spreads, we believe corporate bonds remain undervalued. Accordingly, we remain over-weighted to that sector. Given the anemic growth rate of the Canadian economy, we remain cautious about prospects for the retailing sector and for real estate issuers. Our longstanding aversion to commodity risk remains and we, therefore, continue to avoid mining and oil & gas issuers.

Even with the recent narrowing of yield spreads, we believe corporate bonds remain undervalued. Accordingly, we remain over-weighted to that sector. Given the anemic growth rate of the Canadian economy, we remain cautious about prospects for the retailing sector and for real estate issuers. Our longstanding aversion to commodity risk remains and we, therefore, continue to avoid mining and oil & gas issuers.

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