How Funds Regroup After Canada's Worst Bond Rout Since 1994

2017-08-08 16:20:18

By Maciej Onoszko

(Bloomberg) — Investors are dusting themselves off after the worst two-month rout in Canadian government bonds in 23 years. Sovereign bonds lost 3.4 percent in June and July, according to a Bank of America Merrill Lynch index, pushing yields up the most among developed markets. The market slumped after the Bank of Canada turned hawkish and raised interest rates on July 12 for the first time in seven years.

The yield on Canada’s two-year federal government bond rose 55 basis points since the end of May to 1.24 percent on Tuesday. The country’s 10-year bondyield added 50 basis points over the same period and briefly traded above 2 percent for the first time since 2014 in the last couple of weeks. The rate was at 1.91 percent on Tuesday.

Here’s how some fund managers and their teams, who manage a collective C$116.5 billion ($92 billion) are playing it:

Patrick O’Toole, CIBC Asset Management, C$60 billion:

is more than double-weight corporates and underweight government bonds vs FTSE TMX Universe Bond Index

with the economy doing well, corporate bonds — even though they’re not cheap — are a better place to be than government bonds

technically 10-year and 30-year government bonds look oversold, “but the momentum is still on the downside”
“Good rule of thumb” is that the two-year yield is trading 25 basis points to 40 basis points over the overnight rate, so assuming BOC hikes in October, the current level is “probably fine”

Sri Tella, Fidelity Investments, C$22.5 billion:

move up in sovereign bond yields is “a bit overshot,” making yield levels looking “a little more attractive”

not convinced what the Bank of Canada signaled is a “true hiking cycle”

expects one more hike by the end of the year, likely in October

five-year part of the curve is most attractive

favours short-term corporate bonds

Andy Kochar, AGF Investments, C$6 billion:

shorter end of the Canadian curve “is a better place to be” than the long end, with markets pricing rate increases “fairly”

“We have rightfully repriced the short end of the yield curve because of the cyclical upswing in the Canadian economic picture, which was underappreciated by market participants.”

10-year yields could still rise along with global bonds as the Fed and the ECB may tighten policy

corporate credit is expensive and it’s better to own more defensive sectors such as telecom and high-quality financials such as deposit notes

Ed Devlin, Pimco, C$17 billion:

favors the short-end of Canadian curve with yields likely now anchored

sees another rate hike this year, followed up with one or two in 2018

“The likelihood that they go much faster than that is low; the likelihood that they go slower than that is much higher”

Kamyar Hazaveh, CI Investments, C$11 billion:

favors exposure to U.S. duration vs Canadian duration

says increase in 2Y, 5Y and 10Y yields has made them attractive, yet it’s too early to start buying
time to come back might be closer to end-2017 or 1Q when the BOC changes course on its hawkish rhetoric
favors curve steepeners to take advantage of potential change in the bank’s rhetoric

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