After rising slightly in the first week of the month, yields of all maturities of Canada bonds moved lower over the balance of November. Mid term issues experienced the largest declines, with yields of bonds maturing in 5 and 10 years falling 22 basis points, while 2 and 30-year yields dropped 17 and 13 basis points, respectively. The outperformance of mid term issues was similar to the changes in U.S. yields, although the Canadian moves, unusually, were larger.

The Canadian federal sector returned 1.19% in November, as lower yields resulted in higher bond prices. Provincial bonds returned 1.32%, on average. Their longer average durations helped offset the impact of their yield spreads widening by 5 basis points in the month. The corporate sector lagged government bonds in the risk-off environment, earning 0.43% as their yield spreads widened an average of 15 basis points. As in October, the new issue supply was relatively subdued by the risk-off sentiment. In November there were $5.4 billion of fixed rate, investment grade corporates issued. The Bank of Canada’s series of interest rate hikes was also on investors’ minds, as $1.4 billion of floating rate notes were also issued. Non-investment grade corporates fared poorly in the more cautious environment, returning -0.95% in the period. Real Return Bonds declined an average -0.51% in November, as falling oil prices caused an auction of new RRB’s late in the month to have a very sloppy result. Preferred shares, though, had the weakest fixed income result in November, falling a remarkable -8.56%. A combination of factors, including ETF sales, tax-loss selling, and retail investors fearing a repeat of the 2015 bear market, led to a sharp sell-off in illiquid conditions.

As this is being written the Bank of Canada has left its interest rates unchanged, as anticipated. The accompanying statement suggested that the Bank is aware of the recent weakness in some economic indicators and that it will be data dependent in making its next change to monetary policy. The Bank repeated its previous observation that it would need to raise interest rates further to achieve a neutral monetary stance. In other recent statements, the Bank has also indicated that it would prefer interest rates to be higher when the next economic slowdown occurs so that it will have more room to lower rates to provide stimulus. Obviously, the Bank does not want to raise rates too quickly and cause that slowdown.

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