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For today’s soundbites, we discuss Canadian fixed income with Dustin Reid, vice president of investment management at Mackenzie Investments. We talked about yields, the impact of recent Bank of Canada announcements, and the international view of Canadian bonds. We started by asking about the status of our sovereign bonds.

Dustin Reid (DR): Well, I would say that during the pandemic, particularly the back half of 2020 and into earlier this year, the demand for Canadian sovereign fixed income, at the federal level, has been very strong. And part of that is because, you know, a lot of the other major markets in the world are generally yielding negative returns at least on a domestic basis. So, the demand for Canadian fixed income, particularly I would say in the last six months, has been quite strong. And a lot of that is a function of a Canadian growth story and a yield story.

About Canada’s Covid response.

DR: I would say Canada really has, in many ways, led the world in terms of the size of the response to the pandemic in terms of monetary credit availability and fiscal support. And, of course, the question longer term is, what are the ramifications for future generations for taking on this debt burden. But, of course, everybody is taking on a massive amount of debt here. This isn’t one country going off on its own and printing a ton of money and doing a lot of fiscal and everyone else is kind of looking at this other country, and saying, ‘Wow, what’s going on over there?!’

About the impact of stimulus spending.

DR: The interesting part there is going to be how much net issuance needs to be done in each country. In the U.S., the Covid bill that’s been passed — the $1.9 trillion — a lot of it was direct cheques that people cashed and spent or in the process of spending or saving. But the next iterance is the infrastructure bill, and that’s different because it takes a lot longer to hit the economy. And a lot of that spending is going to be doled out over 10 years. So even though it’s a massive number, $3 or $4 trillion — and again as proposed, it hasn’t actually gone through yet — it is the spending of $300, $400, $500 billion a year, again which is not small, but on a $20 trillion economy in the U.S., it doesn’t have the same immediate impact. The same could be said in Canada. When we had the federal budget in April, the borrowing levels looked to be a little bit lower than what a few people thought would be the case. So, while there’s a massive amount of spending going on here in Canada, the issuance side may not be, you know, as big a deal.

The significance of the Bank of Canada’s decision to cut bond buying by 25%.

DR: The Bank of Canada tapering its bond purchase amount, I think was somewhat significant. Keep in mind that the bank did taper from $5 billion a week to $4 billion a week, back in October. This move in April was from $4 billion to $3 billion. Going into the meeting, I would say a lot of people, including myself, thought that this would be more of an accounting move. The bank doesn’t really want to hold more than 50% of the total outstanding amounts of government bonds. And the bank was running around, I don’t know, 42%, 43% going into the April meeting. And at $4 billion a week, it probably would have been around 48% by the end of the year, and 52% by the end of March. And it just didn’t want to go there. But when the bank had the meeting in April, it was clear that things looked a lot better in April than it did in January. Particularly, it looked like Q1 got off to a much better start than it had expected. In fact, I think the bank in January had expected a minus 2.5% GDP print for Q1 and the bank now expects plus-7% for Q1. So, it was a massive swing. And so, I think it was not only an accounting reason to taper, but it was also fundamental because things looked a lot better.

And finally, why Canadian fixed income returns have been fairly low lately.

DR: Yeah, I mean, generally, prices have been lower, yields have been higher, so it’s been tough goings a little bit on the Canadian fixed income side. Although, I do see rates moving higher. The movement in Q1 was significant. I think it would be challenging to see, you know, a similar move in Q2. And I do think we’ll be stabilizing a little bit here. The reason I think that fixed income had a difficult time is because people were selling bonds, yields were on the rise, obviously it was a massive push into equities on the global growth story in Q1. And you saw that textbook reaction.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Dustin Reid, vice president of investment management at Mackenzie Investments.

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