MONTHLY FIXED INCOME UPDATE

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1 MONTHLY FIXED INCOME UPDATE Hank Cunningham October 7, 2015 Interest Rate Summary 30-Sep Dec Dec Dec Dec-11 U.S. 3-Month T-Bill 0.00% 0.04% 0.07% 0.04% 0.01% 2-Year Treasury Year Treasury Canada 3-Month T-Bill Year Canada Year Canada Performance Sep Year-to-Date DEX Universe Bond Index -0.27% 2.52% 8.79% -1.19% 2.65% 9.67% DEX Federal Bond Index -0.01% 2.97% 6.91% -1.52% 2.11% 8.41% DEX Provincial Bond Index -0.72% 2.49% 12.18% -2.70% DEX All Corporate Index -0.06% 2.07% 7.58% 0.84% 6.22% 8.24% DEX A Corporate Index 0.07% 1.86% 9.10% -0.16% 6.85% 10.1% DEX Real Return Bonds n.a. 2.04% 13.18% -13.1% Comments: Most indices produced small negative returns in September. Coupled with larger losses in August, year-to-date performance results are modestly positive. Corporate bonds trail the returns on Government bonds this year by a relatively wide margin. September began where August left off. The U.S. economy continued its moderate expansion led by the consumer, the housing market, and further improvement in employment. The U.S. dollar remained firm and the rout in commodity prices and emerging market currencies continued. The market raised the odds of the Federal Reserve Board increasing its key lending rate to over 50%. Then, on September 18, the Fed turned markets upside down. Not only did it leave the Fed Funds Rate unchanged, but it also released a dovish statement, citing many global worries, along with a tepid outlook for inflation. The dollar weakened and bond yields plunged. For the month, Two-Year and Ten-Year Treasury bond yields fell by 11 and 14 basis points respectively. For the rest of the month, domestic U.S. data turned softer, especially in manufacturing. At month-end, the employment report was disappointing enough for the market to assume that the Fed would be on the sidelines

2 until The dollar weakened further and there has been a short-term rebound in commodity prices and emerging market currencies. In Canada, the Bank of Canada held rates steady, citing two solid months of GDP reports and trade results, along with a more upbeat economic outlook. The Canadian currency was stabilizing before this latter move in commodity prices and is now solidly off its recent lows. The high-yield bond market came under renewed pressure in September as the weakness in commodity prices broadened. Default rates continue to be modest but are expected to rise in coming months. The investment grade Corporate bond market also continued to underperform Government bonds as new issues were priced at concessions to outstanding bonds, causing yield spreads to widen. Odlum Brown Limited Page 2 of 7

3 Technical Corner U.S. 10-Year Treasury Yield (%) Day Moving Average Day Moving Average 1.2 Source: Odlum Brown Limited, Bloomberg This bellwether bond s yield has moved lower to 2.06% and is now below its moving averages. Odlum Brown Limited Page 3 of 7

4 Canada 5% June 1, 2037 Spot, 30-day and 200-day moving averages day moving average /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/ /09/2015 Source: Odlum Brown, Bloomberg This long-term Canada bond remains below its 200-day moving average despite the recent rally. Odlum Brown Limited Page 4 of 7

5 8.5 BLP ACTIVE HIGH YIELD US CORPORATE BOND INDEX YIELD Source: Bloomberg, Odlum Brown This chart shows the continuing stress in the high-yield bond market. Odlum Brown Limited Page 5 of 7

6 2.5 CORE PCE PRICE INDEX PER CENT Source: Federal Reserve of St. Louis This is the Federal Reserve Board s favourite inflation measure. It remains well below the Fed s 2% target. Outlook Current conventional wisdom has the Fed on the sidelines until With the outlook for moderate growth to continue in the U.S., with little in the way of inflation pressures, bond yields should face little upward pressure. Yields will likely stay range-bound near the lower end of the 2 to 2.5% range for the U.S. Ten-Year note. The persistence of a soft U.S. dollar should continue to benefit commodity prices and commodity-based currencies. One view that is making traction is that central banks are largely out of ammunition with which to stimulate their economies and now is the time for fiscal stimulus to lead the way. This may be an appropriate time but there appears to be no groundswell of support for it yet. Odlum Brown Limited Page 6 of 7

7 The Canadian economy has shaken off its recession tag and should display moderate growth in the 2% range. Strategy This is a time for fixed income investors to maintain high quality in their portfolios. There remains risk in certain cyclical commodity-related bonds. We continue to favour non-cyclical A-rated Corporate bonds within the context of fixed income portfolios diversified by both maturity and by credit. Please read our Odlum Brown Limited Disclaimer and Disclosure - It is important! Odlum Brown Limited is an independent, full-service investment firm focused on providing professional investment advice and objective research. We respect your right to be informed of relationships with the issuers or strategies referred to in this report which might reasonably be expected to indicate potential conflicts of interest with respect to the securities or any investment strategies discussed or recommended in this report. We do not act as a market maker in any securities and do not provide investment banking or advisory services to, or hold positions in, the issuers covered by our research. Analysts and their associates may, from time to time, hold securities of issuers discussed or recommended in this report because they personally have the conviction to follow their own research, but we have implemented internal policies that impose restrictions on when and how an Analyst may buy or sell securities they cover and any such interest will be disclosed in our report in accordance with regulatory policy. Our Analysts receive no direct compensation based on revenue from investment banking services. We describe our research policies in greater detail, including a description of our rating system and how we disseminate our research, on the Odlum Brown Limited website at This report has been prepared by Odlum Brown Limited and is intended only for persons resident and located in all the provinces and territories of Canada, where Odlum Brown Limited's services and products may lawfully be offered for sale, and therein only to clients of Odlum Brown Limited. This report is not intended for distribution to, or use by, any person or entity in any jurisdiction or country including the United States, where such distribution or use would be contrary to law or regulation or which would subject Odlum Brown Limited to any registration requirement within such jurisdiction or country. As no regard has been made as to the specific investment objectives, financial situation, and other particular circumstances of any person who may receive this report, clients should seek the advice of a registered investment advisor and other professional advisors, as applicable, regarding the appropriateness of investing in any securities or any investment strategies discussed or recommended in this report. This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Please note that, as at the date of this report, the Research Analyst responsible for the recommendations herein, associates of such Analyst and/or other individuals directly involved in the preparation of this report hold securities of the issuer(s) referred to directly or through derivatives. No part of this publication may be reproduced without the express written consent of Odlum Brown Limited. Odlum Brown Limited is a Member of the Canadian Investor Protection Fund. Odlum Brown Limited Page 7 of 7