The shift to lower yields in Canadian bonds was similar to, but slightly larger, than the drop in U.S. Treasury yields. As a result, Canadian yields dropped even further below comparable U.S. yields. Indeed, partway through the month, the spreads between Canadian and U.S. yields hit all-time records before recovering somewhat by month end. In the 1980’s and the early 1990’s Canadian yields were substantially higher than U.S. yields, but that changed as Canada adopted its 2% inflation target and the federal government began to correct its chronic deficits. In recent years, Canadian yields have moved steadily lower than their U.S.

Federal bonds returned 1.85% in the month as lower yields resulted in higher bond prices. The provincial sector earned 3.12% with its longer average duration producing larger price gains as benchmark yields fell. Having tightened 13 basis points in the previous two months, provincial yield spreads widened by 2 basis points in March. Investment grade corporate bonds earned 1.99% in the month. Demand for new issues was strong and, as a result, corporate yield spreads widened only one basis point despite $11.8 billion of new issues coming to market. Non-investment grade issues lagged higher quality issues, earning only 1.36% in the period. Real Return Bonds earned 4.03% in the month as their very long average duration produced strong gains as yields declined. Preferred shares declined -0.46% in the month; rate reset issues declined because investors worried that the drop in 5-year bond yields would result in lower dividends going forward.

1 2 3 4 5 6