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The LOM CAD Fixed Income Fund achieved a net total return of 0.73% in the fourth quarter; while its stated benchmark, the Bloomberg Barclays Canadian Aggregate 1-5 Year Index returned 0.44% during the same time period.
Despite heightened political and pandemic volatility, developed markets registered respectable performance for the year. Widespread innovation, a rebounding economy and ultra-low interest rates are expected to support profit growth as we go into 2021.
The Bank of Canada (BOC) expects Canadian GDP growth to rebound by 4.2% in 2021 after declining 5.7% in 2020 from the prior year. Canada is expected to get back on track this year as the approved vaccines get rolled out. The Trudeau government has invested over $1 billion to secure more than 400 million doses from multiple manufacturers, among which includes 60 million from Pfizer and Moderna, the only two that have been approved in the country so far. The next challenge is the logistics to get the vaccine from the freezers to people’s arms. To some extent the speed of global inoculation and herd immunity has become critical for economic growth and risk market performance in general.
The Canadian central bank has shown commitment to use monetary tools to lift the Canadian economy out of the Covid induced recession. The Bank of Canada Overnight Lending Rate started 2020 at 1.75%, policymakers reduced the target rate to 1.25% in early March, then sharply cut the rate to 25 basis points in April as a response to the pandemic. The October policy report indicates the governing council’s intention to maintain the overnight target rate at its lowest bound until the target inflation rate of 2% is sustainably achieved, which will likely not happen until 2023.
As for the Quantitative Easing (QE) Program, the BOC announced its plan to increase purchase of longer-term bonds, which will have more impact on individual and business borrowing. Weekly purchases will be reduced from $5 billion a week to $4 billion. The governing council judges these combined changes will result in at least as much monetary stimulus as before. In total, the BOC has purchased over $180 billion in Government of Canada bonds since the program launched in March.
As a response to QE, the Canada Sovereign Curve shifted downward significantly and steepened in the first half of last year. The yield curve continued to steepen in the second half of the year, although at a much slower pace. Over last year, the one-year government bond yield has dropped by 1.5% to just 14 basis points, while the thirty-year note declined by only 0.5% to 1.2%. As the economy reopens, we expect further steepening of the yield curve and inflation expectations rising as more people go back to work.
The Canadian Fixed Income fund has benefited from our duration management and credit selection in the last year. In depth security analysis has and will continue to enable us to pick outperformers. As For the year of 2021, we will continue to maintain a relatively short duration while enhancing yield from selector allocation.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
