Fixed Income Quarterly—Benchmark Barometer
Page 3
both the Broad Composite (2.77%) and Broad Government (2.68%). Broad Corporate BBB in particular with a total re- turn of 3.80% now ranks as the best performer so far in 2014. Yet, the strong early gains experienced by Provincials and Agencies to start the year, in large measure due to their longer duration, still have them following in second and fourth place, respectively. At this point then, it is not clear that adding credit risk has been fully justified from a risk/reward perspective. Nevertheless, our expectation for range-bound yields over the near term is supportive of Corporates over Provies. Overall, the demand for Broad Corporates during 2014 has brought its spreads in by nine basis points, indicative of the ongoing
investor search to add yield. Also of note, the emergence of meaningful issuance from the banks toward the end of March did weigh on total returns for Broad Corporate AA, despite the fact that domestic primary market activity from the Big 6 banks is still low compared with last year.
We maintain our belief that the prospect of external risk remains elevated and advise investors to improve credit qual- ity when possible through strategies such as buying preferred issuers within a sector, rather than indiscriminately adding sector exposure. We also believe cash will continue flowing into the Canadian corporate bond market largely due to the additional pickup offered over paltry GoC yields.
Table 2.1: FTSE TMX Canada (formerly DEX) Universe Bond Index Modified Duration
Source: PCBond, a business unit of TSX Inc.
FTSE TMX Canada (formerly DEX) Universe Bond Index Weightings
Sector
Short
Mid
Long
Broad
31-Mar-14 28-Feb-14
Change
31-Mar-14 28-Feb-14
Change
31-Mar-14 28-Feb-14
Change
31-Mar-14 28-Feb-14
Change
Composite
2.72
2.71
0.02
6.17
6.21
(0.04)
13.58
13.67
(0.09)
6.84
6.87
(0.03)
All Government
2.72
2.70
0.03
6.32
6.37
(0.04)
13.88
14.00
(0.12)
7.39
7.41
(0.03)
Canada Agencies Provincial
2.43 2.97 3.07
2.38 2.93 3.02
0.04 0.04 0.05
6.23 6.56 6.31
6.15 6.81 6.38
0.08 (0.26) (0.07)
13.92 13.58 13.88
14.01 13.71 14.02
(0.09) (0.13) (0.14)
6.31 4.77 9.28
6.40 4.69 9.30
(0.09) 0.08 (0.01)
Municipal
3.04
3.13
(0.08)
6.08
6.10
(0.02)
14.68
14.82
(0.14)
8.06
8.16
(0.10)
All Corporate
2.73
2.73
(0.00)
5.77
5.79
(0.02)
12.57
12.54
0.03
5.61
5.63
(0.02)
Corporate AA Corporate A Corporate BBB
2.78 2.55 2.87
2.75 2.62 2.85
0.03 (0.06) 0.01
5.64 5.74 5.83
5.75 5.77 5.82
(0.11) (0.03) 0.01
8.42 12.91 12.32
8.35 12.88 12.31
0.07 0.03 0.01
3.23 6.81 6.30
3.19 6.87 6.33
0.04 (0.06) (0.04)
Chart 2.1: FTSE TMX Canada (formerly DEX) Universe Bond Index Weightings
Chart 2.2: Change in FTSE TMX Canada (formerly DEX) Universe Bond Index Weightings
Corporates 30.7%
Agencies 11.6%
Provi/Muni 31.7%
Canada 26.1%
Corporates 0.31
(0.40) (0.30) (0.20) (0.10) 0.00 0.10 0.20 0.30 0.40
Canada (0.03)
Agencies (0.13)
Provi/Muni (0.16)
Source: PCBond, a business unit of TSX Inc.
Source: PCBond, a business unit of TSX Inc.