In the United States, the economic news continued to show a strong recovery from the spring’s severe recession. The unemployment rate fell to 6.9% from 7.9% the previous month following better than expected job creation. The drop in the unemployment rate during the recovery, though, has been exaggerated by the number of discouraged workers leaving the labor force. In contrast with Canada’s experience, the U.S. participation rate at 61.7% remains well below February’s level of 63.4%. Had the discouraged workers remained in the labor force, the U.S. unemployment rate would still be over 9.0%. The housing sector continued to be a source of strength, but retail sales were weaker than expected as consumer sentiment fell with the surge in the number of COVID-19 cases in the United States. The Federal Reserve left its interest rates unchanged at its November meeting, but gave a rare nod to the Bank of Canada in its statement. In October, the Bank had decided to offset a reduction in its Government of Canada bond purchases by increasing the duration of the acquired bonds, and the Fed said it was considering a similar duration extension in its quantitative easing programme.

Government bond yields in both Canada and the United States were quite subdued during November, with most maturities seeing only a basis point or two change versus a month ago. Only 30-year bonds saw more movement with Canada bonds and Treasuries at that maturity declining by 8 and 6 basis points, respectively. The decline in long term bond yields was a little surprising given the positive, risk-on sentiment brought on by the good vaccine news. The index duration extensions in early December likely played a part in the lower yields as investors anticipated the shifts with purchases of long term bonds.

During November, federal bonds earned 0.25% as the small decline in long term yields resulted in slightly higher average prices. The provincial sector gained 1.28% in the month. Provincial returns were helped by the decline in long term Canada yields and a 6 basis point narrowing of their yield spreads. Investment grade corporate bonds gained 1.68% in the month as yield spreads on average tightened by a remarkable 18 basis points following the vaccine news. In addition, some investors focused on issues that had not recovered as much since the spring and, as a result, BBB-rated issues outperformed higher rated corporates, tightening by an average 20 basis points in the period. High yield bonds also fared well in the risk-on environment, rising 1.99% in November. Energy related high yield issues had particularly good gains (+2.58%) as the price of oil jumped more than 26% in the month. Real Return Bonds earned 2.28%, helped by the unanticipated rise in inflation. In addition, there was some index-related buying of longer RRB’s because their average duration was going to increase significantly when the Canada 2021 issue dropped out of the index on December 1st. Preferred shares earned 5.18% in the month, bolstered by the S&P/TSX composite gaining more than 10% in the same timeframe.

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