Fixed Income Strategies


January 2024


The US Federal Reserve’s shift on interest rates in the fourth quarter fuelled a rally in almost every asset class, from speculative technology stocks to junk bonds. The Treasury market posted its first annual gain since 2020 as slowing inflation bolstered views that the Fed’s rate-hiking campaign was likely over. The Fed acknowledged that economic activity has slowed and job gains have moderated. The Fed also outlined a potential path for rate cuts.

The market may have gotten ahead of itself as investors sought to deploy cash before the end of the year. The market is pricing in six quarter-point rate cuts over the course of 2024. Investors have also been puzzled by the failure of a widely expected recession to materialize.

As for the Bank of Canada, it is concerned that inflationary pressures are broad-based. Economic growth has stalled in the middle quarters of 2023 as higher interest rates restrain consumer spending. The labour market is tightening and job creation has slowed. However, wages are still rising at a high rate despite a modest increase in unemployment.

Corporate Bond Strategy

Pembroke’s Corporate Bond Strategy returned 3.77% in the fourth quarter, underperforming its benchmark by 3.86%. The strategy’s significantly shorter duration detracted from performance amid falling yields. Year-to-date, the strategy’s 9.29% return represents 0.92% added value, with spread tightening on high-yield issues from Air Canada, Latam Airlines, AMC and Spirit AeroSystems leading performance. The strategy’s approximately 30% allocation to floating-rate bonds, which have performed well in previous quarters, was a relative detractor in the fourth quarter, as yields reversed sharply.

Going forward, the strategy continues to maintain exposure to below investment grade issues that are attractive on a risk-adjusted basis, while maintaining a large liquidity position in tax-efficient discount Canadian bonds that can be easily sold to take advantage of future credit opportunities in the event of a market downturn. The strategy enters 2024 with a yield of 6.7% and a duration of 2.1 years, which remains defensive against volatile government bond yields given that inflation continues to be above the central banks’ target.

Canadian Bond Strategy

Pembroke’s Canadian Bond Strategy returned 7.26% in the last quarter, trailing its benchmark by 1.01%. The strategy’s relatively short duration detracted from performance in a period of falling yields. On a year-to-date basis, the strategy’s return of 7.21% is 0.52% ahead of the benchmark, with strong performance coming from long single-A rated bonds issued by Enbridge, Hwy 407, Nav Canada and Canadian Utilities, which benefited strongly from both the spread tightening and yield declines experienced in the fourth quarter. A modest detractor from performance was the strategy’s underweight to BBB-rated credits relative to the benchmark, as spreads tightened further during the year.

Going forward, the strategy continues to maintain a significant position in tax-efficient discount Canadian bonds, which can be used to take advantage of future credit opportunities in the event of a market downturn. The strategy enters 2024 with a healthy yield of 4.7% and a duration of 6.3 years, which remains marginally short of the benchmark to protect against volatile government bond yields as inflation remains above the central banks’ target.


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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.