Ahead of the Curve: Monthly Bond Market Recap and Outlook – December 2024

Recap

• Bond markets dropped in the month of December with the FTSE Canada Universe Bond Index down -0.69%, as the yield curve steepened with short-term yields declining and mid-and-long-term yields rising. The Bank of Canada (BoC) lowered its policy rate by 0.50% from 3.75% and 3.25%.
• In Canada, bond yields continue to try and play catch-up with the U.S., however, the divergence between the US 10year and Canada 10-year bond yields widened further. Domestically, the macroeconomic backdrop signaled marginally ‘higher’ growth, as the December print for both the S&P Global Canada Composite PMI Output Index and the S&P Global Canada Services PMI Business Activity Index registered above 50 (51.5 and 51.2, respectively) in November, indicating improved confidence and outlook. On the Consumer Price Index (CPI) front, while headline inflation came in slightly lower than expected (1.9% actual vs. 2.0% expected and previous), core measures were higher than expected. On the labour front, while the unemployment rate continued to move higher (6.8% actual vs. 6.6% expected vs. 6.5% previous), the net change in employment came in stronger than expected (50.5k vs. 25k expected vs. 14.5k previous) with most of the gains attributed to full-time employment within the wholesale and retail sectors. Monthly GDP figures (October) were stronger both month-over-month and year-over-year (0.3% and 1.9%, respectively), however, early estimates from Statistics Canada is pointing to a slight pullback in November (-0.1% month-over-month).
• In the U.S., the Federal Reserve (Fed) lowered its policy rate by 0.25% from 4.75% to 4.50% and reduced market expectations of future rate cuts.
• The short-end of the bond curve belly (FTSE Canada Short Term Overall Bond Index, 0.38%) outperformed both the belly (FTSE Canada Mid Term Overall Bond Index, -0.28%) and the long-end (FTSE Canada Long Term Overall Bond Index, -2.68%). Shorter duration corporate bonds (FTSE Canada All Corporate Bond Index, -0.14%) outperformed longer duration government bonds (FTSE Canada All Government Bond Index, -0.87%), driven by bonds within the Financial and Real Estate sectors.
• Credits spreads on investment-grade corporate bonds (FTSE Canada All Corporate Bond Index) widened 4bps over the month compared to the 14bps of tightening last month. Shorter-duration bonds within the Financial and Real Estate sectors outperformed longer-duration bonds within the Infrastructure, Energy, and Communication sectors.
  

Source: Guardian Capital based on month over month (MoM) change data for the FTSE Canada Universe Bond Index from PC Bond, and data from Bloomberg for the Canada Sovereign Curve rates (ID: YCGT0007); as at December 31, 2024

The Look Ahead

• Canada continuing to economically underperform the US will likely continue to support Canadian bond yields at lower levels when compared to US Treasuries.
• From an interest rate term structure perspective, the market consensus is that the yield curve will continue to steepen as the Bank of Canada normalizes policy towards its neutral rate.
• From a credit perspective, tight corporate spreads can remain tight for some time but also make these cyclically tight spreads subject to several event/fundamental risks, as sentiment shifts between attractive all-in corporate yields combined with robust corporate earnings and concerns about geopolitical risks and upcoming US policy impacts.

Positioning Opportunities

• For investors seeking to reduce the reinvestment risk associated with Guaranteed Investment Certificates (GICs) and high-interest savings accounts (HISAs) due to short term yields moving lower, GuardBonds^TM, a suite of target maturity funds, provide attractive yields and offer the potential for greater tax efficiency because of the capital gains potential embedded in purchasing of discount bonds. Additionally, GuardBonds^TM are able to provide daily liquidity to investors unlike non-redeemable GICs, which may penalize investors for early redemption.
• With credit spreads at the lower-end of a multi-year range and significant new bond issues coming in the primary market, the Manager has implemented portfolio credit hedges within the Guardian Strategic Income Fund.
• Reducing credit risk in favour of lower beta corporate bonds, while incrementally adding curve exposure aiming to enhance returns (i.e., roll-down) from further steepening of the yield curve in the Guardian Investment Grade Corporate Bond Fund.
• Reducing exposure to higher beta corporate bonds and lowering contribution to duration from corporate bonds to maintain yield carry, while seeking to mitigate risks from a spread widening event. The Manager re-applied yield curve steepening position (i.e., overweight the belly of the curve) in the Guardian Canadian Bond Fund.

Source: Guardian Capital based on data for the FTSE Canada Universe Bond Index from PC Bond, Bloomberg as at December 31, 2024 **Details of the Indexes used in the chart can be found on page 5.

Guardian Fixed Income Funds | Current Positioning

GuardBonds™ Investment Grade Bond Funds

• A suite of actively managed, defined maturity bond funds, that can be used to efficiently construct customized bond ladders.
• Mostly invested in Investment Grade bonds purchased at a discount, to take advantage of capital gains potential.²
• Excellent GICs alternative, more liquid¹ and tax efficient.²

Guardian Canadian Bond Fund

• Similar duration relative to its benchmark, the FTSE Canada Universe Bond Index (7.28 vs. 7.26 years, respectively, as at December 31).
• Higher concentration in 7- and 10-year key rates and lower concentration in 20- and 30-year key rates, relative to the benchmark.
• Increasing contribution to duration from Provincial bonds while reducing contribution to duration from corporate bonds.

Guardian Investment Grade Corporate Bond Fund

• Similar duration profile relative to its benchmark, the FTSE Canada Mid Term Corporate Bond Index (5.95 vs. 5.86 years, respectively, as at December 31).
• Higher concentration in 10-year key rates and lower concentration in 5-year and 7-year key rates, relative to the benchmark.
• Overweight bonds within the Real Estate and Energy sectors and underweight bonds within the Financial, Infrastructure, Industrial, and Communication sectors.

Guardian Strategic Income Fund (Alternative Fund)*

• Profit taking from US Government bonds (the tactical US yield curve steepener trade) as well as in select holdings within the Energy sector. The Manager remains focused on finding idiosyncratic investment opportunities that provide adequate risk/reward, while managing the Fund’s overall risk exposure by maintaining hedges and aiming to increase overall portfolio quality.
• Added to some positions that the Manager expects could benefit under the new Trump administration in the US, reduced exposure to some of the Fund’s lower coupon corporate hybrid bonds that had outperformed over the year, and maintaining the overweight in some of the higher coupon hybrid bonds. The Manager continues to look for opportunities to add incremental high-quality exposure at wider spreads during risk-off periods.

¹ Each GuardBonds^TM fund, despite having a specified maturity date, is fully liquid (intra-day liquidity on the ETF versions, daily liquidity on the mutual fund versions). GICs – even those of the redeemable variety – do not offer the same option for liquidity should it be needed.

² Each GuardBonds^TM fund prioritizes holding bonds trading at a discount with the intention of holding them until maturity. When a discount bond matures at par  value, the price appreciation is treated as a capital gain. Total return on a GuardBonds^TM fund is expected to consist of bond interest income and capital gains. GICs, on the other hand, are always fully taxed as interest income.

Source: Guardian Capital based on data from PC Bond, Bloomberg as at December 31, 2024

The Duration, Yield to Maturity, Coupon, Average Price and Average Quality shown are based on the weighted average of the securities held in the respective Funds’ portfolio, and for the comparative benchmarks they are based on the weighted average of the Index constituents.

YTM: The Yield to Maturity (YTM) shown is the current yield-to-maturity, gross of fees, based on underlying portfolio holdings as at the date indicated. These yields will fluctuate regularly. YTM represents the expected annual rate of return earned on a bond under the assumption that the debt security is held until maturity.

Note: ^†For the T-Bill Funds, the YTM shown is the Yield to Maturity at Cost or YTM (at Cost), which is the weighted average YTM (at Cost) of each of the underlying T-Bill securities in the portfolio, net of cash. YTM (at Cost) means the percentage rate of return paid if the T-Bill security is held to its maturity date from the original time of purchase. The calculation is based on the coupon rate, length of time to maturity, and original price of the underlying T-Bill securities. This is not the yield, distribution rate or performance return of the Fund and is not intended to represent the distribution or return experience of any unitholder. It is only intended to give investors an idea a particular portfolio characteristic of the underlying securities held in the Fund’s portfolio.

^YTM reported for the Guardian Strategic Income Fund is Yield to Worst (YTW), given the Fund mostly holds high yield securities. YTW represents the expected annual rate of return earned on a bond under the assumption that the debt security is repaid in full ahead of schedule by the issuer. YTW is lower than YTM given the bond would be held over a shorter period, and is more commonly used for high yield securities like the majority of securities in the Guardian Strategic Income Fund’s portfolio.

Current Yield: The Current Yield is an annualized historical yield based on actual net income of the Fund for the seven-day period ended on the date specified and does not represent an actual one-year return.

Note: ^^Current Yield reported for the Guardian Strategic Income Fund is its Distribution Yield. Distribution Yield is based on Series F distributions per unit over the trailing 12 month period, divided by the end of period unit price. This is a more appropriate measure of the rate of income an investor may expect from the Fund than Current Yield because the Fund may invest in non-coupon paying securities (i.e., futures, option spreads, forwards, etc.) compared to traditional fixed income funds.

*The Guardian Strategic Income Fund is an alternative mutual fund. It is permitted to invest in asset classes or use investment strategies that are not permitted for other types of mutual funds. The specific strategies that differentiate this Fund from other types of mutual funds include borrowing cash, engaging in short selling and investing in specified derivatives. While these strategies will be used in accordance with the Fund’s objectives and strategies, during certain market conditions they may accelerate the pace at which your investment changes in value. This Fund also pays the Manager a Performance Fee equal to 15% of the amount by which the Investment Performance of the applicable series of Units exceeds the aggregate of the High Water Mark and the cumulative Hurdle Amount during the Performance Period. Please refer to the Fund’s prospectus for additional details. Statistics only reflect bond segment.

For more information on the financial terms used in this document, please refer to the Glossary of Financial Terms on our website at: https://www.guardiancapital.com/investmentsolutions/glossary-of-terms/

**Fixed Income Risk-for-Yield Spectrum chart

91 Day T-Bill: FTSE Canada 91 Day T-Bill Index, which tracks Canadian Treasury Bills with maturities of 91 days.

Short: FTSE Canada Short Term Overall Bond Index, which tracks bonds with maturities of 1-5 years.

Mid: FTSE Canada Mid Term Overall Bond Index, which tracks bonds with maturities of 5-10 years.

Universe: FTSE Canada Universe Bond Index, which tracks the universe of corporate and government bonds within Canada.

Long: FTSE Canada Long Term Overall Bond Index, which tracks bonds with maturities over 10 years.

Corporate: FTSE Canada All Corporate Bond Index, tracks corporate bonds within Canada.

High Yield: FTSE Canada High Yield Bond Index:, which tracks high yield bonds within Canada.

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Date published: January 17, 2025