March was a month for optimism, about rising vaccination rates and about rapid economic recovery. A $1.9 trillion stimulus package was passed in the United States, which helped boost expectations of growth. Most major equity markets enjoyed strong gains in the month, while a blockage of the Suez Canal and the spectacular failure of a large hedge fund were short-lived news stories. North American bond yields climbed to pre-pandemic levels as investors anticipated the eventual end to extraordinary monetary stimulus and worried about massive government bond issuance to fund ongoing deficits. The rise in yields led to falling bond prices, particularly for mid and long term bonds. The FTSE Canada Universe Bond index returned -1.49% in March.

Canadian economic data received during the month was generally better than expected. For example, the unemployment rate more than erased the previous month’s unexpected increase, falling from 9.4% to 8.2% on very strong job creation as lockdown restrictions were eased. In addition, Canada’s economy was estimated to have grown in the fourth quarter of 2020 at an annual pace of 9.6%, well ahead of the 7.3% consensus forecast. The housing sector remained very strong, manufacturing sales exceed expectations, and Canada even had a rare monthly surplus in trade. The inflation news was also good with the annual rate rising to only 1.1% from 1.0%, less than forecasts.

The Bank of Canada left its administered interest rates unchanged at its March meeting. It acknowledged that the Canadian economy was growing during the first quarter, rather than shrinking as the Bank had forecast in January. It said that considerable economic slack remained, however, and it gave no suggestion when the economy might be strong enough for interest rates to rise. The Bank did announce that programmes set up last spring to enhance the market functioning of commercial paper, provincial bonds, and corporate bonds will conclude in the next two months, as scheduled and as expected. No indication was given about disposing of the assets purchased under those programmes, but that process is expected to be very gradual. The Bank hinted that it would soon be reducing the scale of its Government of Canada bond purchases but would be reinvesting any maturities in its holdings to keep them from shrinking.

U.S. economic data received during March was less informative than usual because much of it was distorted by the severe winter weather that struck Texas and other states in February. Among the economic series that weren’t affected by the storms was the unemployment rate, which edged lower to 6.2%, and the inflation rate, which rose to 1.7% from 1.4%. Late in the month, the Consumer Confidence survey showed the biggest monthly increase since 2003, suggesting consumer spending may be robust in the next few months.

The U.S. Federal Reserve, to no one’s surprise, left its trend setting interest rates and its quantitative easing programme unchanged at its March meeting. The lack of action came despite sharp upward revisions in the Fed’s expectations for U.S. economic growth and inflation. As noted by one economist “the Fed seems to have adopted a deliberately behind-the-curve mindset when it comes to its exit strategy and will wait to see confirmation of strength before being comfortable signalling withdrawal steps.”

The rise in bond yields in March was greatest in longer maturities, which meant the yield curve steepened in the month. Yields of 2-year Canada bonds surprisingly declined 8 basis points while 30-year yields rose 22 basis points. The decline in very short term yields reflected investors’ demand as they tried to avoid the larger losses in longer term issues. The steepening of the Canadian yield curve was similar to what occurred in U.S. Treasuries, although in that market short term yields rose a few basis points rather than edging lower. Also in the U.S., the increase in 10-year yields was somewhat greater than that of 30-year yields.

In the Canadian market, the rise in yields caused bond prices to decline resulting in the federal sector return of -0.77% in the month. Provincial bonds, which are on average longer term than federal ones, returned -2.42% in March. The underperformance of provincial issues was exacerbated by their yield spreads widening an average of 4 basis points in the period. Investment grade corporate bonds also experienced wider yield spreads versus benchmark Canada bonds in March, resulting in a return of -1.04%. The 3 basis point widening of corporate yield spreads was due primarily to heavy new issuance as corporate borrowers tried to lock in low yields before they rise further. Non-investment grade bonds returned +0.18%, helped in part by stronger equity markets. Real Return Bonds earned -1.48%, which was much better than similar duration nominal bonds. RRB’s benefitted from investor concerns that ongoing massive fiscal stimuli would result in inflation surging higher in the coming months. Preferred shares enjoyed another strong month, rising 1.84% as redemptions of shares caused that market to shrink thereby pushing prices higher.

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