WHAT WE THINK…

 

A Market Full of Risks

“The bond market is priced for a rapid increase of policy rates that will end with Fed Funds peaking at 2.75% next year. Investors are assuming that by then, the economy will have slowed, and inflation will have turned, allowing the Fed to end its policy action. Investors appear to believe that the Fed is impatient to reverse the pandemic-easing that took Fed Funds from 1.75% to near-zero in early 2020. Forward markets imply that the Fed tightening beyond the first 150 basis points (i.e., reversing the Fed Fund easing that took place just before the pandemic, from the prior tightening cycle peak of 2.5%) will be more gradual. However, with so much of inflation being driven by supply-side factors beyond the Fed’s control, it is difficult to predict when and by how much inflation will subside. Labour markets are the largest lever the Fed has, and unemployment and wages will be key variables to watch. Ultimately, if inflation does not show signs of abating, irrespective of signs of a growth slowdown, we think additional increases will eventually be priced into the market. But, unlike the current environment, we would not expect additional tightening to be supported by the same amount of forward guidance from the Fed, suggesting that the short end of the yield curve will not adjust as quickly as during Q1.”

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What We Think…A Market Full of Risks

 

 

Lorica Focused Fixed Income

“There was more punishment for bond investors in April as markets continued to digest the reality of persistent inflation pressures and the difficulty central banks are facing to tame them. Nominal yields across the curve rose to reflect growth that is not quickly faltering and inflation that is not quickly dissipating. However, in contrast to Q1, April was mostly about the rise of long-term real yields, which rose to positive territory after spending most of the pandemic below zero. However, despite the continued rise of consumer price inflation, inflation expectations did not change materially during the month (long-term inflation expectations rose substantially during March). The US and Canadian markets returned -3.79% and -3.49% in local currency terms, respectively in April, contributing to the year-to-date returns of -9.50% and -10.22% for the Bloomberg US Aggregate and FTSE Russell Canadian Universe indices, respectively, which is the worst start to the year since the beginning of the eighties.”

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April 2022 Commentary

 

Lorica Focused Corporate Bond

“Corporate yield spreads ground tighter through mid-April on a flat/inverted yield curve, easing issuance (from record levels), and a steadying macro tone. The market took a step back thereafter, as a hawkish Fed spurred volatility and weighed on market sentiment, weakening all risk assets and causing credit yield spreads to widen into month-end. For the month, Canadian credit yield spreads widened by an average of 16 basis points, with lower beta, higher rated debt generally outperforming. The US high yield market saw the most acute spread widening, with spreads widening by an average of 54 bps with the lowest rated, less rate sensitive CCC-rated spreads gapping out by 87 bps. “

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April 2022 Commentary

  

Lorica Short Term Bond

“There was more punishment for bond investors in April as markets continued to digest the reality of persistent inflation pressures and the difficulty central banks are facing to tame them. Nominal yields across the curve rose to reflect growth that is not quickly faltering and inflation that is not quickly dissipating. However, in contrast to Q1, April was mostly about the rise of long-term real yields, which rose to positive territory after spending most of the pandemic below zero. However, despite the continued rise of consumer price inflation, inflation expectations did not change materially during the month (long-term inflation expectations rose substantially during March). The US and Canadian short term (1-5 years) markets returned -1.00% and -0.92% in local currency terms, respectively in April, contributing to the year-to-date returns of -4.42% and -3.87% for the Bloomberg US 1-5Yr Gov/Credit and FTSE Russell Canadian Short-Term indices, respectively, which is the worst start to the year since the beginning of the eighties.”

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April 2022 Commentary

WHAT WE THINK…
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WHAT WE THINK…

 

WHAT WE THINK

“The Bank of Canada and the Federal Reserve made their first policy statements of 2022 yesterday, and both appear to be using the same playbook. Both banks affirmed their commitments to slow inflation by raising rates – just not yet – and reduce their balance sheets (as a separate process) afterwards. Both banks also indicated that inflation is being driven by supply chain bottlenecks, fiscal policies, and tight labour markets, but that the first two factors would likely dissipate later in the year. Yesterday’s market reaction to the Bank of Canada was reasonably sanguine, noting that the Government of Canada OIS curve is already pricing in about six hikes this year, while the reaction to the Fed was to price in another half hike, such that Fed Futures are now pricing in five hikes this year. Today, long-term yields have fallen, and yield curves have flattened.”

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We have lift off

 

 

Lorica Focused Fixed Income

“It seems so long ago that the dominant issue facing investors was the pandemic and lockdowns. Of course, the pandemic morphed into rising inflation as supply chains, energy and workers all found themselves in short supply. Central banks reacted predictably and sternly, unwinding the temporary inflation theme, replacing it with a rising-rate playbook. And while the initial phase of the pandemic created extreme volatility, treasury and central bank policy had allowed investors to generally take the unfolding environment in stride. We imagined, at the time, that the credit crisis served as a rehearsal for the pandemic. Now, the markets are facing a new bout of uncertainty created by the Russian invasion of Ukraine. For the most part, markets have been calm, not overreacting to information, but punishing those assets most directly related. To a significant extent, investors have been willing to accept the narrative that western economies will be significantly insulated. However, with each day the war continues, additional western actions imperil the global economy, particularly those regions most exposed to Russia.”

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February 2022 Commentary

 

Lorica Focused Corporate Bond

“Early in February, credit spread stability was evident as fears regarding the impact of rate-hikes on credit eased due to healthy corporate fundamentals and overall attractive yield levels for investors. However, geopolitical risks set the tone thereafter as mounting tensions between Russia and Ukraine resulted in a flight to quality and an increase in liquidity risk premiums. Volatility increased, stemming from both the escalating military and humanitarian crisis and the macroeconomic and credit implications of disruptions to international money flows and commodity supplies. “

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February 2022 Commentary

  

Lorica Short Term Bond

“It seems so long ago that the dominant issue facing investors was the pandemic and lockdowns. Of course, the pandemic morphed into rising inflation as supply chains, energy and workers all found themselves in short supply. Central banks reacted predictably and sternly, unwinding the temporary inflation theme, replacing it with a rising-rate playbook. And while the initial phase of the pandemic created extreme volatility, treasury and central bank policy had allowed investors to generally take the unfolding environment in stride. We imagined, at the time, that the credit crisis served as a rehearsal for the pandemic. Now, the markets are facing a new bout of uncertainty created by the Russian invasion of Ukraine. For the most part, markets have been calm, not overreacting to information, but punishing those assets most directly related. To a significant extent, investors have been willing to accept the narrative that western economies will be significantly insulated. However, with each day the war continues, additional western actions imperil the global economy, particularly those regions most exposed to Russia.”

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February 2022 Commentary

WHAT WE THINK…
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