Canadian bond markets continue to perform well

Lori Reeve - September 30, 2012

The JOV Leon Frazer Bond Fund will look to extending the term of bond holdings given the strong credit fundamentals of many Canadian companies, says the Leon Frazer Q3 2012 Quarterly Review

Canadian fixed income markets continued to perform well in the third quarter of 2012. The DEX Short and Mid Term Bond Total Return Indices returned 0.8% and 1.4% respectively, while the S&P/TSX Preferred Share Total Return Index returned 1.9% in the quarter.

Although yields did rise, the mid-September QE3 announcement by the US Federal Reserve caused yields to reverse course. As a result, the yield curve changed little quarter-over-quarter.

In Canada, two-, five- and 10-year government bond yields were 1.06%, 1.29%, and 1.73% as at September 30, up 5, up 6 and down 1 basis point respectively since the end of June. Easy monetary policies from the Fed and the Bank of Canada, combined with investors’ concerns over continued turmoil in Europe, declines in Asian growth rates, and US headlines regarding the presidential election and persistently high unemployment should ensure rates remain at extremely low levels in the near term. That said, we continue to believe long-term nominal yields below inflation rates are unsustainable.

Credit product performed very well over the quarter, with both provincial and corporate bonds outperforming similar term federal bonds.

The JOV Leon Frazer Bond Fund increased both its corporate bond exposure and the term of its corporate holdings during the quarter.

The JOV Leon Frazer Bond Fund’s performance was hurt slightly due to a duration position that was slightly lower than its target. The Fund’s performance was buoyed by its high commitment to corporate bonds, which benefitted from narrowing credit spreads. The Fund will continue to look to extend the term of corporate bond holdings given the strong credit fundamentals of many Canadian companies, while keeping the overall Fund’s duration low.

The JOV Leon Frazer Preferred Equity Fund posted positive performance for the quarter. Perpetual preferred shares were the strongest performing subsector given the strong performance of longer-dated fixed income product. Retractable and fixed reset preferred shares also performed well.

The JOV Leon Frazer Preferred Equity Fund will remain underweight in perpetuals as we expect them to underperform once bond yields begin to rise. The Fund will also remain underweight the Financial sector, in favour of diversified holdings across several industries.