Canadian Bond


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Canadian Fixed Income

Fixed Income | April 04, 2018

Terry Carr, Head of Canadian Fixed Income

Global Intelligence Outlook 2018 - Canadian Fixed Income: The Backdrop Icon


We think it is fair to say that uncertainty abounds and key risks appear to be rising.

The first quarter of the year has certainly been interesting, if recent movements in the financial markets were any indication. In summary, we think it is fair to say that uncertainty abounds, and key risks appear to be rising.

The consensus view in the market is that the Bank of Canada (BoC) will raise rates two more times this year.1 While we concede the consensus view is possible, we believe a more likely scenario has the BoC only raising rates one more time in 2018. In other words, we do not expect the BoC to keep up with the US Federal Reserve in its rate normalizing efforts (we are forecasting a total of three US rate hikes this year, possibly four).

There has been much chatter about 3% on the US 10-Year yield being a resistance level – we believe it will reach this level later in 2018, but we expect to see significant resistance at the 3.5% level. The picture is different in Canada, where we expect the 10-Year yield to rise, but to a lesser extent. The result should be flatter yield curves in both Canada and the US.

From a foreign exchange perspective, this implies that the Canadian Dollar should weaken further in the months ahead, as rates in the US rise more than Canada. A lower Loonie may also reflect the market’s concerns about Canada’s economy. There are three areas that we believe warrant attention:

Real Estate

The property sector has been a key engine underpinning economic growth in recent years, though we think it is likely to continue to cool in the second half of this year. This should not surprise anyone, given the tighter federal mortgage rules introduced in January which placed a meaningful cap on the borrowing capacity of new mortgage applicants.2 The impact of recent efforts by provincial governments to cool property prices will also act as a drag on house prices. For instance, the provincial government of British Columbia introduced a ‘speculation’ levy on vacant properties and raised the foreign buyers' tax from 15% to 20%.3 Understandably, there is speculation that other regional governments could follow suit. While the merits of these measures are self-evident, it is just as important to remember that taking the steam out of the housing market could also slow the Canadian economy.

Minimum Wage

Ontario has been at the forefront of a wider effort to raise the minimum wage in Canada. The minimum wage in the province has risen from C$11.40 per hour to C$14 per hour since October 2016 (a 22.8% increase) and is set to hit C$15 per hour in January 2019.4 Few would dispute the ethical merit of the initiative, but once again, there will be an economic cost associated with it (in terms of consumer spending and inflation). Perhaps coincidentally, Canada lost 88,000 jobs in January (on a seasonally adjusted basis).5 While it is plausible that the data was nothing more than a blip, it certainly suggests that investors should start paying more attention to developments in the labor market.

NAFTA Negotiations

In our view, it is fair to say that negotiations continue to be a challenge. Key sticking points remain unresolved, creating a heightened sense of uncertainty which could weigh on business investment. The political calendar also does not help – the upcoming US midterm elections and July’s general election in Mexico could make already difficult discussions even tougher, as negotiations become even more politicized.

Global Intelligence Outlook 2018 - Canadian Fixed Income: The Opportunities For Investor Icon


Corporate credit remains an attractive area for us.

Although macro risks are rising, we continue to see opportunities within the Canadian fixed income market. Corporate credit remains an attractive area for us. However, we believe it makes sense to move further up the capital structure (e.g. from holding company debt to operating company debt). We also have a slight short bias towards duration, though not dramatically so. Generally, we think it makes sense to be defensively postured at this juncture. That said, we expect to possibly reverse that perspective sometime in the next 12 months. Till then, we believe a cautious approach will serve investors best.

Global Intelligence Outlook 2018 - Canadian Fixed Income: The Risk Icon


We have adopted a more cautious view of the energy sector – pipeline capacity issues continue to beset the development of the sector.

We have adopted a more cautious view of the energy sector – pipeline capacity issues continue to beset the development of the sector. While the federal government has thrown its support behind the expansion of the Trans Mountain Pipeline, a move that would make it possible to transport Canada’s oil resources to new markets more effectively, a disagreement between the province of Alberta and British Columbia has created much uncertainty around the project, and by extension, the sector.6

Global Intelligence Outlook 2018 - Canadian Fixed Income: The On Our Radar Icon


Canada’s federal government has yet to make much progress with regards to its infrastructure initiatives.

The Trudeau government came into office on an anti-austerity platform, having pledged to invest C$60 billion in new infrastructure over the next 10 years.7 Two-and-a-half years later, however, the government has yet to make much progress on this front. For instance, it chose to prioritize other initiatives over infrastructure spending in its most recent budget that was handed down in late February. While it could be said that the federal government is merely keeping its powder dry at a time when the economy is doing well, it would be interesting to see how quickly the government could move if and when economic growth stalls.

1 Bloomberg, as of March 7, 2018.
2 Office of the Superintendent of Financial Institutions: News Release, October 17, 2018.
3 Government of British Columbia: BC Budget 2018: Homes for B.C., February 20, 2018.
4 Government of Ontario: Minimum Wage, as of March 1, 2018.
5 Statistics Canada: Labor Force Survey, January 2018, February 9, 2018.
6 Globe and Mail: Alberta and B.C. Walk into a Trade Minefield, February 17, 2018.
7 CBC: Trudeau’s Government set to Speed Up, Double Down on Infrastructure, January 14, 2016.
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About the Author

2015 Apr Carr TerryTerry Carr

Terry Carr is Head of Canadian Fixed Income for Manulife Asset Management. He is responsible for the Canadian fixed income and money market teams and a senior member of the Manulife Asset Management Investment Committee.

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