As we noted last month, the adjustment in yields following the Bank of Canada’s policy stance has made short and mid term bonds more reasonably priced. The yield of 5-year Canada Bonds, for example, has risen to over 1.50%, which appears to fully discount for another rate increase this year and one in early 2018. Those increases are not guaranteed and may be deferred if the exchange rate continues to appreciate or if the economy stumbles for other reasons. Accordingly, we are looking at deploying more cash into short term issues.

Corporate yield spreads have narrowed to levels not seen since before the financial crisis. Accordingly, the risk reward trade-off has become less favourable. However, as we experienced in 2005 and 2006, spreads can narrow further and stay tight for a relatively long period. In a sense, corporate bond investors are starting to play a game of chicken, trying to determine when to jump out of the market. Selectivity remains key, and we are considering reductions in the corporate sector allocation. We are also looking at the relative spreads for corporate issuers at different terms. If there is little difference in risk premiums between different maturities, it may make sense to reduce term.

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