April 2025
Since the beginning of 2025, the U.S. Administration rolled out tariffs against its most important trading partners, including Canada, Mexico and China. Investors are worried that these chaotic measures will slow economic growth and increase prices.
In this context, the Federal Reserve kept its target rate unchanged between 4.25% to 4.5%, citing higher uncertainty to its economic outlook. “Core” inflation, which excludes food and energy items, has remained high at just over 3%. As for the labour market conditions, they remain strong in the U.S.
For its part, the Bank of Canada reduced its overnight interest rate to 2.75% as trade tensions heightened. Wage growth has moderated, and employment growth will be affected by tariffs, particularly in the auto industry in Ontario. Joblessness in the retail sector is also expected to increase with the liquidation of Hudson’s Bay stores.
In addition, inflation recently benefited from the temporary suspension of the GST/HST, but is expected to rise again now that the suspension is behind us. The Canadian federal election has also introduced promises by leading candidates that will negatively impact the fiscal situation.
Overall, Bond markets rose as interest rates fell, with government indices outperforming corporate indices.
CORPORATE BOND STRATEGY
The Pembroke Corporate Bond Strategy returned 0.1% for the quarter, trailing its benchmark by 1.6%. Exposure to AAA-rated government of Canada bonds proved defensive in a period of spread widening.
While the portfolio is well positioned from a quality and liquidity standpoint, the strategy was not immune to the credit spread widening. Spread widening and underperformance was most pronounced in lower quality issues, with select high yield positions including Corus, Hertz and Air Canada’s convertible bonds experiencing price declines. Additionally, the strategy’s shorter than benchmark duration had a negative impact in a falling yield environment.
The strategy continues to be conservatively positioned with 49.4% invested in AAA/AA-rated securities, 40.4% of which are government bonds or federally guaranteed National Housing Act Mortgage Backed Securities. Duration ended the period at 3.4 years, meaningfully below the benchmark duration of 5.7 years. The strategy continues to hold select high yield issues that are well structured and remain attractive from a risk-adjusted perspective. The portfolio is well positioned to fund any credit opportunities.
CANADIAN BOND STRATEGY
The Pembroke Canadian Bond Strategy returned 2.1% in the first quarter of 2025, outperforming its benchmark by 0.1% as a decline in government rates offset credit spread widening on lower quality issues. Government of Canada bonds, which are sheltered from credit spread widening, proved defensive. Higher quality corporate issues, including long-dated issues from Enbridge Gas, Hydro One and Spy Hill Power, also contributed to performance.
Duration ended the period at 7.3 years, a number that remains neutral relative to the benchmark. The strategy is positioned conservatively with an emphasis on high-quality liquid instruments, including AAA-rated Government of Canada bonds and National Housing Act Mortgage Backed Securities. These can be used to fund upcoming credit 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.
