Credit markets were “relatively subdued” in the second quarter in both Canada and the U.S. amid falling interest rates, while U.S. equity markets continued moving up, buoyed by investor excitement around artificial intelligence. The Canadian equity market, for its part, was left behind as financials and industrials underperformed in the period.
Those are some of the key takeaways from Canso Investment Counsel Ltd.’s July 2024 Canso Corporate Bond Newsletter, which also delves into the reasons behind tightening spreads and examines several bond issues this past quarter.
“In Canada, the front end of the yield curve rallied as interest rates fell in anticipation of the Bank of Canada’s cut in early June. Maturities further out the curve were modestly higher while corporate credit spreads remained constant. As a result, bond market performance in Canada was largely a result of running yield,” Canso’s experts write.
“In the U.S., interest rates ticked up across the government curve, leaving overall returns of high-grade markets only slightly positive. Higher yields and shorter durations of the below investment grade bond and loan markets resulted in strong quarter-to-date and year-to-date returns.”
The question of whether inflation has been defeated or is “merely in hiding” after the latest Bank of Canada rate cut remains a key concern for bond markets, and inflation numbers caused government bond yields to spike in the second week of April.
“This volatility carried to Canadian spreads, though not for long, as those valuations were quickly bought back up. Spreads subsequently hit fresh cycle tights in May before relenting into quarter end to finish about where they started,” the bond newsletter says.
“Credit spreads in the U.S. high yield market also experienced a macro-induced speed bump in April on the way to an eventual cycle tight of 324 bps in May. Spreads relented soon after, but the U.S. High Yield Index finished the second quarter at a very expensive 343 bps.”
At current valuations, Canso says it continues to believe there is little upside for most high yield credit beyond its running yield.
Canso experts also urged caution around high yield issues, many of which involved refinancing of current debt, and reminded investors that it’s important “to be discriminate and ensure they are paid for the credit risk they are assuming.”
Refinancing and repricing activity has also dominated primary markets within the leveraged loan segment, Canso says, all of which makes it “critically important for investors to roll up their sleeves and have a thorough understanding of the risks in an investment as well as be prepared to actively engage after purchase.
The risk of ‘creditor on creditor violence,’ where an improvement for one lender comes at the expense of another, is higher than ever.”
To learn more about Canso’s views on what’s happening in the bond market check out the July 2024 Canso Corporate Bond Newsletter.
You can also read Canso’s overall thoughts on markets in the July 2024 Canso Market Observer.
DISCLAIMER: The views and information expressed in this publication are for informational purposes only. Information in this publication is not intended to constitute legal, tax, securities or investment advice and is made available on an “as is” basis. Information in this presentation is subject to change without notice and Canso Investment Counsel Ltd. does not assume any duty to update any information herein. Certain information in this publication has been derived or obtained from sources believed to be trustworthy and/or reliable. Canso Investment Counsel Ltd. does not assume responsibility for the accuracy, currency, reliability or correctness of any such information.
