Fixed Income Strategies


July 2023


Government bond yields rose during the second quarter, as the U.S. banking crisis abated, and the economy demonstrated resilience despite higher interest rates. Early in the quarter, bonds had rallied as investors worried about the collapse of U.S. regional banks and its potential impact on credit flow to households and businesses. However, yields rebounded even higher as the quarter ended because of favourable economic news, including the resolution of the U.S. debt-ceiling debate. As for the labour market, it remains strong.

In addition, while inflation has trended lower, it is still at a very high level. On one side, there is optimism among a segment of investors who believe that the U.S. Federal Reserve can tame price increases without tipping the economy into recession. On the other side, investors are pointing to the persistent inversion of the yield curve, where short bond yields are higher than long bond yields. Such an inversion of the yield curve generally precedes an economic recession.

Over the quarter, corporate bond spreads tightened, but the underlying rise in government yields resulted in the U.S. Corporate Bond Index falling by 0.2%. However, the Index remains up by 3.2% year-to-date. As for to the U.S. High Yield Bond Index, it rose by 1.6% in the quarter and is up by a solid 5.4% year-to-date. Lastly, the Canadian FTSE Universe Bond Index fell by 0.7% during the quarter, while the FTSE Corporate Bond Index rose by 0.2% for the same period. Year-to-date, these two indices are up by 2.5% and 3% respectively.

At the beginning of June, the Bank of Canada surprised the markets by raising its overnight policy rate to 4.75% after not hiking at its previous two meetings. It has since increased it again to 5%. The central bank admitted to inflation remaining stubbornly high, while consumption and services growth has been strong and spending on interest-sensitive goods including housing has picked up. Demand for labour also continues to be strong and, even with higher immigration, new workers have found employment.

Corporate Bond Strategy

Year-to-date, the corporate bond strategy returned 4.56%, 1.59% ahead of the benchmark return of 2.97%. The strategy benefited from high yield credit spread tightening, particularly in issues of AMC Entertainment and Avis Budget, as well as secured airline debt. Additionally, during the period, the UBS acquisition of Credit Suisse was completed. As a result, Credit Suisse’s senior unsecured notes became direct obligations of UBS Group AG, leading to significant spread tightening.

As for the strategy’s 28% allocation to floating rate issues, it has benefited from the rise in underlying yields, as reference rates have increased during the period. The allocation to floating rate has also aided the strategy to maintain a duration of 2 years, which remains notably lower than the benchmark duration of 5.8 years, all while maintaining a healthy yield to maturity of 7%. The strategy also continues to maintain a large liquidity position comprised of discount Canada bonds. We believe this is an attractive place to deploy capital while waiting to be compensated for assuming additional risk. The strategy is well positioned to take advantage of future opportunities.

Canadian Bond Strategy

The Canadian bond strategy returned 2.43% year-to-date, modestly trailing the benchmark by 8 basis points. Long duration instruments contributed to performance, as long yields declined over the period. In particular, long issues of Hwy 407 Jr. Secured and Enbridge Gas led performance, benefiting from 7 to 16 basis points of spread tightening. The strategy enters the second half of the year with a yield of 4.9% and duration of 5.8 years, which compares favourably with the benchmark yield of 4.4% and a duration of 7.4 years. The strategy will maintain its defensive positioning and increased weight in high-quality liquid bonds, which can be used to take advantage of future opportunities.


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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.