Rising economic confidence among businesses and individuals helped fuel positive market sentiment toward most global risk assets during the quarter. The Federal Reserve (Fed) raised rates in March, a widely anticipated move that acknowledged the strengthening U.S. economy. The Bank of Japan (BOJ), the Bank of England (BOE) and the European Central Bank (ECB) continued to expand their balance sheets, though the ECB will reduce its purchases to €60 billion per month in April. The euro zone avoided a political upset on March 15 when the Dutch elected incumbent Prime Minister Mark Rutte.
Following four months of sideways movement, bonds broke out of their trading range in April, with prices moving higher and yields declining. In large part, the catalyst for lower yields was the flagging optimism about the U.S. economy. The combination of weaker than expected economic data, the chaotic performance of the new Trump administration, and the inability of the U.S. Republican Party to agree on major policies such as the repeal of Obamacare, caused investors to lose confidence in the anticipated economic acceleration from the implementation of Trump’s election promises. Canadian bond yields lowered, following U.S. bond yields. The FTSE TMX Canada Universe Bond index returned 1.43% in April.
A synchronized pickup in global economic activity supported risk appetite during the quarter. Most asset classes generated positive returns, led by high yield credit, equities, and unhedged emerging market bonds. The Federal Reserve (Fed) raised rates in March, a widely anticipated move that acknowledged the strengthening U.S. economy. Corporate profits improved and volatility remained very low. Commodity performance was mixed; metals rallied while oil prices dropped.
The U.S. high yield credit rally that began in 2016 continued into the first quarter, with spreads (the difference in yield between Treasury and non-Treasury securities of similar duration) reaching multi-year tights in early March. Though spreads widened somewhat during the last weeks of the quarter, the asset class handily outperformed Treasurys of similar duration (duration refers to a security’s price sensitivity to interest rate changes).
U.S. Treasury yields reached year-to-date highs ahead of the Federal Reserve (Fed) interest rate hike, then retreated to finish the quarter essentially flat. The yield curve (a curve that shows the relationship between bond yields across the maturity spectrum) flattened as shorter-maturity Treasury yields rose while longer-maturity Treasury yields were nearly unchanged.
All asset classes – fixed income, Canadian equities, and global equities – produced a positive return in the first quarter. Equities continued to advance higher, with the MSCI World Index, up 5.8%, outperforming S&P/TSX Composite Index, which was up 2.4%, following an excellent performance in 2016. The FTSE Canada Universe Bond Index returned 1.2%, a significant rebound from the -3.4% return seen in the fourth quarter of 2016.
The Canadian bond market was remarkably stable in March, as a federal budget, a rate increase and legislative turmoil in the U.S. and the United Kingdom’s decision to exit the European Union were taken in stride by investors, with each event having minimal impact on the market. Bond yields in Canada and the United States remained within their respective trading ranges which began in early December. The FTSE TMX Canada Universe Bond index returned 0.41% in March.
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