Accelerating inflation and rising interest rates caused the global markets to take a bruising in the first half of 2022, the worst in several decades. Bonds, stocks, emerging markets and cryptocurrencies all posted losses.
The Fed admitted that inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures. They have already raised interest rates three times this year. The most recent increase was by 0.75% in June, which was the biggest such move since 1994. The central bank is also starting to reduce its holdings of treasury securities, agency debt and mortgage-backed securities.
The Bank of Canada increased the overnight rate to 1.5% and, even more recently, to 2.5%. Economic growth is strong in Canada and household spending has strengthened after the lifting of public health restrictions. However, the housing market activity has moderated from its lofty levels. As for job vacancies, they remain elevated and companies are reporting widespread labour shortages, while wage growth has picked up across sectors.
The Bank of Canada is concerned about the risk of elevated inflation becoming entrenched and has guided to further rate hikes to curb inflation.
Corporate Bond Fund
The Pembroke Corporate Bond Fund returned -6.65% in the past six months, outperforming its benchmark by 4.32% as spreads widened and yields rose sharply. The Fund’s shorter than benchmark duration and allocation to floating rate securities helped offset some of the pervasive price declines caused by rising benchmark yields.
The Fund continues to increase credit quality and maintain a duration meaningfully below that of the index to mitigate the negative impact of increasing interest rates. The Fund is well positioned with a yield of 5.9%, a duration of 2.2 years, and approximately 36% in floating rate notes. As elevated inflation persists and central banks play catch-up, yields are expected to continue to converge to inflation. The Fund will maintain its defensive positioning and increased weight in high-quality liquid bonds, which can be used to take advantage of future opportunities.
Canadian Bond Fund
The Pembroke Canadian Bond Fund returned -9.79% in the past 6 months, outperforming the benchmark by 2.44%, as spreads widened and yields rose sharply. The Fund’s shorter than benchmark duration continues to be a positive contributor to performance, along with its allocation to floating rate issues.
The Fund ended the period with a yield of 4.1% and a duration of 5.1 years, which compares favourably with the benchmark’s yield of 3.9% and duration of 7.4 years. As elevated inflation persists and central banks play catch-up, yields are expected to continue to converge to inflation. The Fund will maintain its defensive positioning and increased weight in high-quality liquid bonds, which can be used to take advantage of future opportunities.
Other Articles Of Interest
Disclaimer
This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.
