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

Recap

• Bond markets paired back in the month of October, with the FTSE Canada Universe Bond Index retracing -1.01%, even
  as the Bank of Canada (BoC) continued its’ expansionary monetary policy by reducing their policy rate 50 bps.
• In Canada, the macroeconomic backdrop was mixed, as headline inflation came in weaker than expected (1.6% actual
  vs. 2% previous vs. 1.8% expected) while core inflation printed slightly stronger (1.6% actual vs. 1.5% previous vs. 1.5%
  expected). On the labor front, the unemployment rate was lower than expected (6.5% actual vs. 6.6% previous vs. 6.7%
  expected) as the economy added 47k jobs in September. However, monthly GDP figures for the month of August showed
  that growth was flat while the year-over-year numbers came in weaker than expected (1.3% actual vs. 1.5% expected.
  Preliminary September figures also came in weaker than expected (0.3% actual vs. 0.4% expected). Retail sales came in
  weaker than expected (0.4% actual vs. 0.9% previous vs. 0.5% expected) while the weakness in retail sales ex-autos was
  more pronounced (-0.7% actual vs. 0.3% previous vs. 0.3% expected).
• In the U.S., positive economic surprises on the macro front resulted in a steepening of the short segment of the
  government yield curve and a flattening of the long segment of the curve, with the probability of future rate cuts moving
  lower.
• Yield levels across 1-year tenors and less declined while tenors along the rest of the curve saw yields increase. As a
  result, the short-end of the curve (FTSE Canada Short Term Overall Bond Index -0.30%) outperformed both the belly
  (FTSE Canada Mid Term Overall Bond Index -1.44%) and the long-end (FTSE Canada Long Term Overall Bond Index –
  1.59%).
• Corporate bonds (FTSE Canada All Corporate Bond Index -0.50%) outperformed government bonds (FTSE Canada All
  Government Bond Index -1.18%) as credit spreads on investment-grade rated bonds tightened 4bps.
• 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 data for the FTSE Canada Universe Bond Index from PC Bond, Bloomberg as at October 31, 2024

The Look Ahead

• Indications of increasing slack in the Canadian economy, as evidenced by the slowing pace of discretionary consumer
  spending and manufacturing headwinds, indicate that the BoC is likely to continue easing rates for the remainder of
  2024.
• From an interest rate term structure perspective, the market consensus is that the yield curve will continue to steepen as
  the BoC normalizes policy towards its neutral rate.
• From a credit perspective, credit spreads continue to compress and remain relatively tight on a historical basis. While
  risks may be skewed to spreads widening, they can continue to grind tighter over several months or quarters.

Positioning Opportunities

• With bond prices largely reflecting a steepening yield curve, the Manager 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 (Guardian Canada Bond Fund).
• For investors seeking to reduce the reinvestment risk associated with Guaranteed Investment Certificates (GICs) and
  high-interest savings accounts (HISAs) due to yields moving lower, GuardBonds™, 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™ are able to provide daily liquidity to investors unlike nonredeemable GICs, which may penalize investors for early redemption.
• With risks being asymmetrically skewed to credit spreads widening, 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 October 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 potential capital gains.²
• Excellent GICs alternative, more liquid¹ and tax efficient.²

Guardian Canadian Bond Fund

• Longer duration profile relative to its benchmark, the FTSE Canada Universe Bond Index (7.16 vs. 7.35 years, respectively, as at September 30).
• Higher concentration in the 7-year and 10-year rates and lower concentration in 20-year and 30-year rates, relative to the benchmark.
• Overweight corporate bonds (Financials) and underweight government bonds (primarily Federal bonds).

Guardian Investment Grade Corporate Bond Fund

• Similar duration profile relative to its benchmark, the FTSE Canada Mid Term Corporate Bond Index (6.10 vs. 5.85 years, respectively, as at September 30).
• Higher concentration in the 10-year rate and lower concentration in the 5-year and 7-year 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., New Fortress Energy) and Financials sector (i.e.
  Navient Corp), while opportunistically participating in new bank issues (i.e., RBC) and the Paper & Pulp sector (i.e.
  Mercer Int’l Inc.) .The Manager remains focused on finding idiosyncratic investment opportunities that provide
  adequate risk/reward while managing its overall risk exposure by maintaining hedges and increasing overall
  portfolio quality.
• Although defaults on high yield bond issues have ticked up year-to-date, their proportion in the market is well within
  expectations for this year and is concentrated in a couple of highly levered industries (e.g. Technology, Media, and
  Telecom). The risk-reward trade-off for high-yield more broadly and corporate hybrid bonds remains intact (albeit a
  bit less than earlier this year) given generally healthy fundamentals, a relatively measured amount of primary
  supply and easing financial conditions. The Manager continues to look for opportunities to add incremental high-quality
  exposure at wider spreads during risk-off periods. The Manager continues to maintain this focus for
  companies held in the Fund’s portfolio.

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

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.

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Guardian Capital LP is the Manager of the Guardian Capital mutual funds and ETFs. Guardian Capital LP is a wholly-owned subsidiary of Guardian Capital Group Limited, a publicly traded firm, the shares of which are listed on the Toronto Stock Exchange. For further information on Guardian Capital LP or its affiliates, please visit www.guardiancapital.com. All trademarks, registered and unregistered, are owned by Guardian Capital Group Limited and are used under license.

Date published: November 19, 2024