BMO Nesbitt Burns is shifting its bond strategy in response to the economic recovery. BMO suggests moving to bonds that are very close to 5 years. “These bonds offer good value and should continue to provide healthy returns as they move toward maturity. Further we have moved our duration to neutral, as yields are unlikely to move much lower on a sustained basis.”

BMO asserts that it is undeniable that the U.S. and Canadian economies have turned the corner and that recession is in the rear-view window. “However, recovery will not necessarily prove to be negative for bonds. The Fed and the Bank of Canada have likely finished their easing cycles. But with unemployment rates set to rise further in the near term, and inflation to remain low, neither central bank will be in any rush to begin moving rates higher.”

BMO is still under-weighting corporate bonds though. “The decidedly positive turn in economic data points toward a recovery and has already led to a sharp narrowing in Canadian corporate spreads. Spreads have narrowed so much, so quickly, that further gains will be hard to come by in the near term, until there are clear signs that a recovery in profits has taken firm hold.”

BMO notes that corporate issuance in January was $3.3 billion, up from $1.7 billion in December 2001, but down from $3.4 billion in January 2001. “There was very strong demand for the new issues,” it says. “In several cases the deal sizes were increased, and still oversubscribed. The demand for corporate product extended to higher yielding debt as there was much interest in the $450 million Rogers Cable deal. Other large issuers included Bell Canada ($500 million), and GTAA ($500 million).”