Fixed Income Strategies


October 2023


Government bond yields increased as the third quarter concluded. Stronger than anticipated data led investors to believe that the U.S. Federal Reserve might maintain high interest rates to temper the economy. The announcement from the U.S. government about additional Treasury sales to support fiscal deficits contributed to the decline in bond values. Currently, bonds are on track to have a third successive annual drop, a historic occurrence.

Although inflation continues to wane, it is nearly double the Federal Reserve’s target of two percent. This situation keeps the option of another rate increase by the Federal Reserve open for consideration. To date, forceful rate increases by central banks have heightened short-term yields, leading to a prominently inverted yield curve. The market had anticipated a recession and forecasted rate reductions, which kept longer-end yields lower. However, the expected recession did not occur, leading investors to eliminate monetary easing from their pricing.

Presently, investors are in pursuit of a term premium. The Canadian FTSE Universe Bond Index declined by 3.9% for the quarter, while the FTSE Corporate Bond Index decreased by 2.2% within the same timeframe. Their year-to-date performance stands at a decrease of 1.5% and an increase of 0.7%, respectively.

During September, the Bank of Canada retained its overnight rate at 5%. The Bank expressed concerns regarding widespread inflationary pressures. There has been a noticeable reduction in consumption growth coupled with a drop in housing activities. The growth of household credit has decelerated due to the effects of higher rates limiting expenditure across various borrower groups. Nonetheless, wage growth remains robust, even with a slight relaxation in labour market circumstances. The Bank conveyed its readiness to raise the policy interest rate if inflation consistently surpasses its 2% objective.

Corporate Bond Strategy                            

During a markedly negative quarter for fixed income, the corporate bond strategy yielded a 0.72% return, significantly outperforming the benchmark, which posted a return of -2.22%. The negative impact of rising government rates predominantly affected long-duration assets. The annual return stands at 5.32%, which is significantly ahead of the benchmark.

The third quarter saw gains from a shorter duration relative to the index, supported by a 33% stake in floating rate issues, which benefit from rising reference rates, and by an underweight position in long-term debt. Selected holdings below investment grade, such as LATAM Airlines and AMC Entertainment, positively impacted performance due to tightening spreads. The primary negative influence was an Air Canada convertible bond, which experienced a price drop as the company’s stock value decreased.

The strategy now boasts a healthy yield of 7.5%. Its duration of 1.8 years offers protection against potential interest rate hikes and is significantly shorter than the benchmark. The strategy maintains an exposure to below-investment-grade issues, deemed attractive on a risk-adjusted basis, while also retaining a substantial liquidity position in tax-efficient discount Canada bonds. These bonds can be swiftly liquidated to capitalize on upcoming credit opportunities during potential market downturns.

Canadian Bond Strategy

The Canadian bond strategy reported a return of -2.43% for the quarter, outperforming the benchmark by 1.44%. Year-to-date, the strategy’s return is -0.05%, which is 1.41% ahead of the benchmark. Contrary to the previous quarter, the most significant rate increases occurred at the long end of the curve. Stable credit spreads could not counteract the effect of rising yields.

As such, longer-term issues from companies like Enbridge, Highway 407 and Rogers Communications negatively impacted the performance during this period. In contrast, short corporate bonds and floating rate notes played a role in reducing the decline and conserving capital.

As the fourth quarter begins, the strategy offers a yield advantage over the index at 5.5%, with a duration of 6.0 years. This duration is slightly below the benchmark, safeguarding against potential rate hikes. The strategy remains defensive, holding a significant liquidity position in tax-efficient discount Canada bonds, which can be leveraged to seize future credit opportunities in case of market declines.


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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.