July 2025
Following a turbulent second quarter, investors remain concerned that tariffs will hinder economic growth and push prices up. Furthermore, the U.S. President’s recent tax bill has created uncertainty in the bond markets, as it is expected to add trillions to the debt levels. The independence of the Fed has also been threatened by Donald Trump, who wants to announce a new Fed Chair soon—someone who will reduce rates. Against this backdrop, investors are selling long-term treasuries, despite the fact that revenues from tariffs and higher growth could reduce the debt level.
As for the Bank of Canada, it has maintained its overnight interest rate amid heightened trade tensions. However, previous rate cuts have supported economic growth by increasing consumption. Inflation also fell when the federal consumer carbon tax was reduced.
Meanwhile, government bond markets fell in the second quarter as bond yields rose. Conversely, higher running yields and narrowing risk premiums have supported the corporate bond market.
CORPORATE BOND STRATEGY
In the second quarter, the Pembroke corporate bond strategy delivered a positive return, outperforming its benchmark by a healthy margin. Spread tightening offset an increase in yields, which was most pronounced at the long end of the curve.
High-yield bonds issued by Hertz, Air Canada and Avis Budget were the top performers. These bonds increased in value due to spread tightening. Limited recourse capital notes (LRCNs) also contributed to performance, appreciating in value during this period. Neither high-yield bonds nor LRCNs are constituents of the benchmark.
The strategy remains conservatively positioned, with 49.7% invested in AAA/AA-rated securities (40.4% of which are government bonds or federally guaranteed National Housing Act mortgage-backed securities [NHA MBS]). The duration ended the period at 3.2 years, significantly below the benchmark duration of 5.6 years. The portfolio continues to hold select high-yield issues that are well structured and attractive from a risk-adjusted perspective. With ample liquidity, the strategy is well positioned to finance future credit opportunities.
CANADIAN BOND STRATEGY
The Pembroke Canadian Bond Strategy saw a slightly negative return in the second quarter. This matched the return of the benchmark, with rising yields putting pressure on government bonds with a long duration.
During this time, the portfolio’s overweight position in corporate credit served as a defensive measure, with tightening spreads partially offsetting the impact of higher yields. Performance was supported by exposure to limited recourse capital notes and high-quality corporate issues, such as those from Honda Canada Finance, New York Life and MetLife. In contrast, the strategy’s allocation to Government of Canada bonds detracted from returns, as these bonds did not benefit from the rally in spreads.
Duration ended the period at 6.8 years, remaining generally neutral relative to the benchmark. As spreads remain within historical averages, the strategy is positioned conservatively, focusing on high-quality, liquid instruments. These include AAA-rated Government of Canada bonds and National Housing Act Mortgage-Backed Securities (NHA MBS), which can be used to finance future 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.
