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

Recap

• Bond markets bounced back in the month of November, with the FTSE Canada Universe Bond Index up 1.68%, as yields across all bond tenors declined.
• In Canada, the macroeconomic backdrop was mixed, as headline inflation came in slightly higher than expected (2.0% actual vs. 1.6% previous vs. 1.9% expected). On the labour front, the unemployment rate was lower than expected (6.5% actual vs. 6.5% previous vs. 6.6% expected), while the economy added 14.5k jobs in October (27.2k expected vs. 46.7k previous). Final monthly GDP figures for the month of September showed that growth was flat while the preliminary figures for October came in lower than expected (0.1% actual vs. 0.3% expected vs. 0.0% previous). The annualized quarterly GDP figures for the third quarter were also weaker than expected (1.0% actual vs 1.1% expected vs. 2.1% previous). While consumer spending on durable items was a major contributor during the quarter, the key driver of growth remains to be spending on government employee wages and purchases of goods and services.
• In the U.S., negative economic surprises on the macro front resulted in a flattening of the government yield, as the Federal Reserve (Fed) lowered its policy rate by 25bps from 5% to 4.75%.
• The long-end of the bond curve (FTSE Canada Long Term Overall Bond Index 3.59%) outperformed both the shortend (FTSE Canada Short Term Overall Bond Index 0.57%) and the belly (FTSE Canada Mid Term Overall Bond Index 1.32%).
• Mid-term corporate bonds (FTSE Canada All Corporate Bond Index 1.67%) slightly underperformed longer duration government bonds (FTSE Canada All Government Bond Index 1.69%).
• Credits spreads on investment-grade corporate bonds (FTSE All Corporate Bond Index) narrowed 14bps over the month compared to the 6bps of tightening last month. Longer-duration bonds within the Infrastructure and Energy sectors outperformed shorter-duration bonds within the Financial, Real Estate and Industrial.
  

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 November 30, 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, we expect credit spreads to remain rangebound over the coming months, 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

• With bond prices largely reflecting a steepening yield curve, the Manager of the Guardian Canadian Bond Fund is reducing overweight key rate duration exposures from the belly of the curve to the short and long end of the curve and continues to trim down the corporate credit exposure in favor of Provincial bonds.
• 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, GuardBondsTM, 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, GuardBondsTM 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 supply coming in the primary market, the Manager has implemented portfolio credit hedges within the Guardian Strategic Income Fund.

Source: Guardian Capital based on data for the FTSE Canada Universe Bond Index from PC Bond, Bloomberg as at November 30, 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 potential capital gains.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 (7.47 vs. 7.50 years, respectively, as at November 30).
• Higher concentration in 10-year key rates and lower concentration in 20-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 (5.89 vs. 6.02 years, respectively, as at November 30).
• 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, Financial, and Energy sectors and underweight bonds within the Infrastructure, Industrial, and Communication sectors.

Guardian Strategic Income Fund (Alternative Fund)*

• Profit taking in select holdings within the Energy sector (i.e., Keyera Corp, Howard Midstream Energy Partners LLC), while tactically adding a yield curve steepener trade in US government bond futures, that could benefit if 2-year yields decline, and 10-year yields rise. 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 are 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.

Source: Guardian Capital based on data from PC Bond, Bloomberg as at November 30, 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.

1-3yr Government Bond: FTSE Canada 1-3 Government Bond Index, which tracks Government of Canada Bonds with maturities of 1-3 years.

3-5yr Government Bond: FTSE Canada 3-5 Government Bond Index, which tracks Government of Canada Bonds with maturities of 3-5 years.

5-7yr Government Bond: FTSE Canada 5-7 Government Bond Index, which tracks Government of Canada Bonds with maturities of 5-7 years.

7-10yr Government Bond: FTSE Canada 7-10 Government Bond Index, tracks Government of Canada Bonds with maturities of 7-10 years.

Canada Aggregate: FTSE Canada Universe Bond Index:, which tracks all Canadian Bonds.

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

US High Yield: ICE BofA US High Yield Index, which tracks high-yield bonds within the US.

1 Each GuardBonds™ 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™ 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™ fund is expected to consist of bond interest income and capital gains. GICs, on the other hand, are always fully taxed as interest income.

DISCLAIMER

This commentary is for informational purposes only and does not constitute investment, financial, legal, accounting, tax advice or a recommendation to buy, sell or hold a security. It shall under no circumstances be considered an offer or solicitation to deal in any product or security mentioned herein. It is only intended for the audience to whom it has been distributed and may not be reproduced or redistributed without the consent of Guardian Capital LP. This information is not intended for distribution into any jurisdiction where such distribution is restricted by law or regulation.

Please read the prospectus, Fund Facts or ETF Facts before investing. Important information, including a summary of the risks, about each Fund is contained in its respective offering documents. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund and exchange traded fund (ETF) investments. You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF a stock exchange. If the units are purchased or sold a stock exchange , investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. For ETF Units and mutual funds other than money market funds, unit values change frequently. For money market mutual fund Units, there can be no assurances that these mutual fund Units will be able to maintain their net asset value per unit at a constant amount or that the full amount of your investment in the fund will be returned to you. Mutual fund and ETF securities, including money market funds, are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. Mutual funds and ETFs are not guaranteed, and past performance may not be repeated.

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Date published: December 12, 2024