Q3 2017 Commentary – Mackenzie Fixed Income Team | Mackenzie Investments

Q3 2017 Commentary

Mackenzie Fixed Income Team

Outlook & Positioning

  • The third quarter produced a negative total return for Canadian bond holders as the yield curve continued to rise, albeit more gradually, after the Bank of Canada’s shift to hawkishness in June. The Bank twice moved the policy higher by 0.25% in consecutive meetings (July and September), and seemed to keep a tightening bias in their statements. Only near the end of September did we hear Poloz soften the language slightly. By the end of the quarter, the yield curve adjusted to price-in roughly two more hikes of 0.25% over the next twelve months.
  • In sympathy with the sudden, sharp change in yields and prospective additional monetary policy tightening, the CAD adjusted, rapidly appreciating versus the USD and other major currencies. Only the slightly softer, late-September, language from the Bank, combined with slightly more hawkish comments from Federal Reserve Yellen’s, caused the CAD to weaken back toward US$0.80.
  • Looking ahead, both the Canadian and US yield curves have largely priced-in one more 0.25% policy rate hike from their respective central banks this year. Markets continue to expect only gradual tightening adjustments in major economies, including the beginning of the Fed’s balance sheet reductions in October. It is also expected that the ECB will begin tapering bond purchases early in 2018. The Bank of England has also begun to reflect a slightly less dovish tone, notwithstanding the great uncertainty surrounding the Brexit process that remains.
  • Although the Canadian yield curve provided us with quite an unexpected jolt this summer, and recent slightly less dovish/more hawkish leanings in policy might make one wary of a protracted bond bear market, it serves to keep in mind that we remain mired in a particularly yield-sensitive world. Inflation rates of consumer goods and services prices remain low and stable in most regions, and wage gains have been tepid for most households despite consistent employment growth, giving central banks no particular reason to be aggressive. Even with a mindset to get ahead of the inflation curve, existing higher levels of household and government debts globally will likely restrain central bank policy rate and yield curve actions going forward. Our expectation is that government yield curves will remain in recent low ranges – with some periods of rising and falling yields along the way – for an extended period of time to come.
  • Perhaps because of the “goldilocks” nature of non-inflationary economic growth and low yields, equity and corporate credit market volatility has drifted lower this year. Credit spreads have narrowed, generally, and defaults rates have remained low. This has allowed some stretching of valuation in parts of the high yield bond and loan markets – areas that we have been avoiding, in favor of better valued issuers. As the credit cycle moves forward, we will continue to become ever-more selective in our holdings of corporate credit, as well as continue to increase the diversity of our holdings and tighten our downside risk protections as needed. For now, we still see some opportunity to gather additional yield and diversity from actively managed exposures to corporate credits markets.

Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of September 30, 2017 including changes in unit value reinvestment of all distributions and do and not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

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To the extent the Fund uses any currency hedges, share performance is referenced to the applicable foreign country terms and such hedges will provide the Fund with returns approximating the returns an investor in a foreign country would earn in their local currency.

This document includes forward-looking information that is based on forecasts of future events as of June 30, 2017. We will not necessarily update the information to reflect changes after that date. Risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Some of these risks are changes to or volatility in the economy, politics, securities markets, interest rates, currency exchange rates, business competition, capital markets, technology, laws, or when catastrophic events occur. Do not place undue reliance on forward-looking information. In addition, any statement about companies is not an endorsement or recommendation to buy or sell any security.

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