Our economic forecast does not anticipate a recession in 2019, but the outlook is murkier for 2020. The stimulus from the U.S. tax cut in December 2017 will have faded and lingering unanticipated consequences from the U.S.-initiated trade war will further slow growth. In Canada, we will still have to contend with a shortage of pipeline capacity that is hamstringing the energy sector. In 2020, we will also have to contend with home buyers from 2015 experiencing sticker shock as their mortgages renew at substantially higher rates. In light of the potential for slowing growth, we are gradually shifting to more defensive and higher quality corporate issues in the portfolio.

Portfolio durations are being kept close to neutral as the current risk-off sentiment moves through financial markets. We believe the recent rally in government bonds is overdone, though, and we are monitoring the market for opportune times to reduce durations again. We continue to believe the differentials between yields of different terms are too small (i.e. the yield curve is too flat), and that the current demand/supply imbalance of long duration bonds will eventually correct causing long term yields to rise. In anticipation of that occurring, we have structured the portfolio to benefit from increasing term differentials (i.e. a steepening of the yield curve).

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