2012 starts on a flat note for fixed income

March 30, 2012

On a historical basis, government yields remain anaemically low, below both the annual inflation rate and the yield on the S&P/TSX Composite Index, reports the Q1 2012 Quarterly Review

Canadian fixed income markets slowed down in the first quarter of 2012 after an exceptionally strong performance in 2011.

The DEX Short and Mid Term Bond Indices both posted returns of 0.0% in the first quarter, with the weak performance of the government sectors offset by the strong performance of the corporate sector. The S&P/TSX Preferred Share Index returned 1.3% in the quarter.

After trading in a very narrow range in January and February, yields on North American government bonds rose sharply in March after the US Federal Reserve indicated that, for the time being, they did not see a need for additional quantitative easing.

However, since the announcement, yields have retreated somewhat. The entire yield curve shifted up over the quarter as the yield on one-year Government of Canada bonds rose 16 basis pointsto end the quarter at 1.09% and the yield on 10-year Government of Canada bonds rose 17 basis points to end the quarter at 2.11%.

Longer-term, we expect bond yields will rise as the global situation stabilizes and there is moderate economic growth in North America

On a historical basis, government yields remain anaemically low, below both the annual inflation rate and the yield on the S&P/TSX Composite Index. North American central banks are expected to keep short-term interest rates anchored at low levels until they are confident the economic recovery has legs and the prospects of exogenous risks are diminished.

Longer-term, we expect bond yields will rise as the global situation stabilizes and there is moderate economic growth in North America.

Provincial credit spreads were stable over the quarter and as a result, provincial bonds performed in line with federal bonds. Corporate credit spreads moved steadily lower, as investors’ risk appetite improved. As a result, corporate bonds generally outperformed federal bonds. Corporate credit fundamentals in Canada remain strong, largely due to the belt tightening undertaken in the wake of the credit crisis.

The JOV Bond Fund performed well in the first quarter. The Fund’s overall high commitment to corporate bonds, despite their conservative nature, contributed to the Fund’s strong performance. The Fund will continue to favour an overweight to high quality corporate bonds. The duration of the Fund will continue to be held close to neutral in the near term, however, it will be shortened should event risk begin to wane and economic indicators improve.

The JOV Leon Frazer Preferred Equity Fund posted positive performance for the quarter. Despite the rise in government bond yields, perpetual preferred shares were the strongest performing subsector, buoyed by the strength of financials, in particular, insurance companies. The Fund’s underweight in financials detracted from performance. The Fund will remain underweight perpetuals, as we expect them to underperform once bond yields begin to rise. To ensure the Fund’s holdings are diversified across many industries, it will also remain underweight the financial sector.

Adapted from the Q1 2012 Leon Frazer Quarterly Revie

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