Bond markets appeared poised for a third straight year in the red at the end of the third quarter of 2023, but sharp declines in government bond yields and shrinking risk premiums during an exceptionally strong fourth quarter galvanized fixed income investors and set the stage for a bond comeback in 2023.
“Corporate bond markets raced higher in the fourth quarter as inflation continued to decline, labour market strength showed signs of moderating and Federal Reserve policymakers signaled their rate hiking efforts may be coming to an end,” Canso Investment Counsel Ltd. wrote in their January 2024 Corporate Bond Newsletter.
In fact, they note, the ICE BofA Canada Corporate Index posted its second-strongest quarterly return of this century, in the final quarter of 2023.
Sprint to the Finish
In the newsletter, Canso referred to the run up as a sprint to the finish (of 2023). But, successful investing is more akin to running a marathon than a sprint. While both require discipline and focus, a long-term mindset is critical to investment and marathon success.
“The shift in tone sparked an expansive rally, propelling equities, investment grade and high yield bonds higher,” Canso’s portfolio managers said.
“High yield credit spreads also significantly benefitted from the Fed fuelled rally over the final two months of 2023. Spreads tightened sharply in the early days of November and then again in December as markets forged ahead with expectations of more aggressive easing next year.”
Volatility persists
As noted in a prior Canso publication: “In the boring bond markets, a move of more than 5 bps in a day is noteworthy.”
This magnitude of change used to be rare, but Canso remarked “when we look at the 10-year Government of Canada bond, yield moves greater than 5 bps occurred on more than half the trading days in 2023 (135 of 259). In addition, the bond’s yield moved in excess of 15 bps on 10 separate days, more days in 1 year than the full decade preceding 2022.”
For more on Canso’s thoughts and observations regarding both investment grade and high yield bonds, check out the January 2024 Canso Corporate Bond Newsletter.
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