In March the index provider FTSE Russell concluded a review of its methodology used to create a composite rating in its benchmark Canadian bond indices. With a fourth rating agency, Fitch, increasingly being recognized, FTSE Russell needed to determine what rating would apply if the four agencies (DBRS, Moody’s, S&P, and Fitch) had a three-way split on the rating. The new methodology will take the middle rating of the three lowest ones. The change will impact only one outstanding bond, a recently issued CIBC bail-in bond that will be reclassified BBB from A.

We believe the economic expectations that have driven bond yields below the Bank of Canada’s overnight target rate are overly pessimistic. Several factors lead us to this conclusion including several positive economic indicators, the impact of the recent sharp decline in bond yields, more sanguine views of other financial markets, recovery in oil prices, and the U.S. election cycle.

Among the positive economic indicators, the labour situation in both Canada and the United States is very strong. Unemployment is at historically very low levels and job creation has been robust. As a result, consumer confidence is quite good. Transitory factors such as the U.S. government shutdown in December and January and the poor weather of February are depressing some current economic data, but they will pass. In addition, federal government initiatives such as increased immigration, first time home buyers’ incentives, and increased depreciation allowances for businesses should have a small positive impact on Canadian growth.

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