Internationally, the second wave of COVID-19 cases in several European Union countries continued. As a result, some governments were forced to reinstate social distancing restrictions that had only recently been loosened. With regard to the Brexit negotiations, Britain threatened to abrogate the treaty it signed with the European Union earlier this year, increasing the likelihood of a disruptive no-deal departure from the EU at the end of the year.

The Canadian yield curve shifted slightly lower in September, with 2 and 30-year Canada bond yields declining 3 and 5 basis points respectively. The Canadian performance was slightly better than the U.S. bond market which saw only marginal changes in yields in the month.

During September, federal bonds returned 0.41% with small price gains augmenting interest income. The provincial sector earned 0.43% in the period. The yield spreads of short and mid term provincial bonds were little changed, but long term spreads widened 5 basis points in the month. Investment grade corporate bonds returned a meagre 0.01% in September. Corporate yield spreads widened an average 5 basis points in the month’s risk-off environment, with BBB-rated bonds and longer maturities seeing the largest increases in spreads. New issue supply of $11 billion came mostly in the first half of the month, as more cautious investor sentiment and widening yield spreads in the second half led to slower issuance. High yield bonds returned 0.76% in September, as a lack of new issues apparently overcame investors’ cautiousness. Real Return Bonds earned only 0.03%, as the surprisingly low CPI result lowered interest in inflation hedges. Following three months of robust gains, preferred shares returned only 0.16%, but still fared better than investment grade corporate bonds.

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