Natixis Canada Blog

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Canadian Bond Market Seesaws in February as Yields Rise Then Fall Twice in the Month

 

Jeff Herold
Jeff Herold, Portfolio Manager, NexGen Canadian Bond Funds

The Canadian bond market moved in a seesaw pattern in February, with yields rising and then falling twice in the month. The bond market remained in the trading range that began in December, once the market had initially reacted to the surprise U.S. presidential election result. The market’s focus remained on the new U.S. administration, as the correlation between Canadian and U.S. bond yields was very high. Investors were hoping for greater clarity on the new government’s fiscal, regulatory and trade policies. The economic consensus remained optimistic, with risk premia (yield spreads) for provincial and corporate bonds shrinking and the U.S. stock market continuing its post-election rally. The FTSE TMX Canada Universe Bond index returned 0.96% in February.

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Canadian Preferred Shares Continued to Move Upward in Price in February

Jeff Herold
Jeff Herold, Portfolio Manager, NexGen Canadian Preferred Share Fund

Following their very strong gains in January, Canadian preferred shares continued to move upward in price in February, but at a more subdued pace. Reduced activity in preferred share Exchange Traded Funds (ETFs) probably accounted for the smaller preferred share gains. The Bank of Montreal Laddered Rate Reset ETF (ZPR) experienced a 45% drop in units created from January to February, although a meaningful $81.8 million still flowed into the ETF. We suspect that the lower activity in ZPR reflected reduced hedging requirements for structured notes as the RSP season wound down. Because of the lower demand for rate reset preferred shares, that sector underperformed the broad market for the first time since last September. Also in February, new issue activity increased to four issues, compared with only one the previous month. The S&P/TSX Preferred Share index returned 1.49% in the month.

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Canadian Bond Market Seesaws in January as Investors Discern the Impact of the Change in U.S. Government

 

Jeff Herold
Jeff Herold, Portfolio Manager, NexGen Canadian Bond Funds

The Canadian bond market experienced a seesaw month as investors tried to discern the impact of the change in the United States’ government. After a weak finish to 2016, with lower bond prices and higher yields, it appeared that in January the market was catching its breath and evaluating whether it had discounted too much following the election of Donald Trump as U.S. president. Slightly higher yields for long-term bonds resulted in lower prices that caused the value of the overall index to decline marginally. The FTSE TMX Canada Universe Bond index returned -0.12% in January.

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Preferred Shares Immune to the Volatility Arising From the Changeover in U.S. Administration

Jeff Herold
Jeff Herold, Portfolio Manager, NexGen Canadian Preferred Share Fund

The Canadian preferred share market started 2017 with a bang, outperforming investment grade bonds, common stocks and even junk bonds by a significant margin. Unlike other securities, preferred shares were immune to the volatility arising from the changeover in the U.S. administration. In part, the strong performance of preferred shares reflected investors’ ongoing search for attractive yield combined with limited new issue supply. In addition to investors purchasing outstanding individual issues, preferred share ETF trading volumes hit a record high in January. We believe that much of the ETF activity did not reflect simple buying of the asset class, rather, it was hedging of structured notes linked to the preferred share market. The S&P/TSX Preferred Share index returned 4.05% in January.

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Divergence Between Stock and Bonds in Q4 2016 Highlights the Importance of a Balanced Strategy

Ron Patton, Portfolio Manager, Natixis Strategic Balanced Fund

Market Review & Outlook

The fourth quarter’s most distinctive attribute was the divergence between stock and bond performance, highlighting the importance of investing in a balanced strategy. The FTSE TMX Canada Universe Bond Index turned in its worst quarterly performance since March 1994. Yields increased ~45 basis points resulting in a -3.4% return. Stocks, represented by the MSCI World Index and the S&P/TSX Composite Index, moved higher. Canadian equities were the best performing asset class (up 4.5%), followed by global equities (up 3.9% in Canadian dollars), then bonds. As a result, our overweight position in global equities relative to Canadian equities was a slightly negative factor, while our underweight in bonds and our exposure to preferred shares was a positive factor.

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