Prior to now month, bond yields rose considerably following the U.Okay. authorities’s first finances and the U.S. election. Soubeyran mentioned traders anticipate greater charges “to persist for longer as a result of these events.”
Canadian authorities bond returns “fared relatively well” throughout this era, posting flat or modest, constructive returns, versus largely unfavourable returns elsewhere within the G7, she mentioned.
For the 12 months to Oct. 31, short-duration bonds benefited from central financial institution easing and low inflation, whereas bonds with longer durations noticed unfavourable returns. In Canada, for instance, short-, medium- and long-duration bonds posted returns of three.8%, 2.3%, and –2.1%, respectively.
“It’s the battle between shorts and longs,” Soubeyran mentioned.
She famous that Canadian authorities bond returns in native currencies “look better than other G7 peers” 12 months up to now, highlighting the “huge currency impact” on returns for Canadian traders.
Excessive-yield credit score dominated efficiency within the third quarter and 12 months up to now.
In Q3, Canadian high-yield company bonds posted returns of three.5%, whereas U.S. high-yield bonds noticed 3.7% returns. By comparability, each Canadian and U.S. investment-grade bonds posted returns of two.2% through the three-month interval.
For the 12 months to Oct. 31, Canadian high-yield company bonds posted returns of 9.5%, whereas U.S. high-yield debt noticed 13.8% returns. Canadian investment-grade bonds posted year-to-date returns of 5.4%, whereas U.S. investment-grade returns had returns of 8.8%.
Soubeyran famous that Canadian and U.S. investment-grade bond spreads have been “highly correlated during [Covid-19] and the [monetary] tightening phase,” however that has modified.
“Since 2022, Canadian spreads have decoupled and widened, in line with the U.S. growth desynchronizing and the easing and lower inflation expectations … which resulted in Canadian corporate spreads widening versus the U.S. investment-grade spreads,” she added.
The reverse is true for Canadian and U.S. high-yield company bonds, which have “reconverged after decoupling” within the earlier days of the pandemic,” Soubeyran mentioned.
Within the investment-grade universe, A-rated Canadian bonds have elevated in weight since 2019, mirroring the lower in weight of AA-rated investment-grade bonds. The load of BBB-rated bonds additionally decreased throughout that interval.
In terms of provincial bonds, Alberta has decoupled its spreads from different provinces with AA credit score high quality rankings, Soubeyran mentioned. That is because of the debt-to-GDP ratio estimate for Alberta being “very small and expected to go smaller, compared to much more significant and high ratios from the other provinces, especially in Ontario and Quebec,” she famous.
