The flight-to-safety bid for bonds that occurred early in 2016 continued to fade in April, as the recovery in riskier assets extended for a third month. The price of oil moved higher, equities gained, the Canadian dollar strengthened, and credit-related yield spreads narrowed. Benchmark government bond prices declined and yields rose as investors shifted their attention to other asset classes. The FTSE TMX Canada Universe Bond index returned -0.08% in the month.

Canadian economic news was mixed in April, and provided little impetus for the Bank of Canada to change monetary policy. On the positive side, strong job creation caused the unemployment rate to fall to 7.1% from 7.3% while housing starts, retail sales, and GDP growth all exceeded expectations. Negative surprises included a wider trade deficit as exports plunged more rapidly than imports, weaker than expected manufacturing sales, and a sharp drop in new orders. However, even with these negative surprises, most economists continued to believe that the Canadian economy grew in the first quarter at an annual rate of greater than 3.0%.  In the end, the Bank of Canada decided to leave rates unchanged, but increased its forecast of Canadian growth, in part due to the fiscal stimulus package in the recent federal budget. The bond market interpreted the Bank’s decision to mean rates were unlikely to be reduced in the foreseeable future and that change in expectations led to a selloff in shorter term bonds and higher short term bond yields.

In the United States, economic data was generally disappointing. Unemployment rose to 5.0% from 4.9%, albeit due to a rise in the participation rate. Retail sales were weaker than expected, led by lower vehicle and clothing sales, and housing starts were below forecast levels. In addition, industrial production declined, mainly in mining and utilities but manufacturing was also softer. The U.S. Federal Reserve left its interest rates unchanged, and market participants debated whether the next Fed move would occur in June or be pushed back later in the year.

The price of oil surged 20% higher in April even though negotiations to cap production by major producers failed to arrive at an agreement. The Canadian dollar responded to the move in oil and jumped 3.6% higher versus the U.S. dollar, closing at its highest level since early July 2015.

The Canadian yield curve had been relatively steep because some investors had anticipated further rate reductions by the Bank of Canada. When it became clear in April that the Bank was likely to leave rates unchanged for a longer period, that prompted some selling of short and mid-term bonds. As a result, their yields rose by more than the yields of long term bonds. Yields of 2, 5, and 10-year Canada Bonds increased 14, 19, and 18basis points respectively, while long term yields rose only 7 basis points. Higher yields meant lower bond prices, and the federal sector returned -0.66% in April. Provincial bonds fared better, earning +0.05%in the month. Relatively few new issues combined with very strong international demand caused provincial yield spreads to narrow by 11basis points, thereby offsetting the increased yields of benchmark Canada Bonds. Corporate bonds fared even better, returning +0.52%as yield spreads compressed 16basis points on average. The 20% increase in oil prices appeared to reduce concerns about a global recession and investors scrambled to buy corporate bonds at a time of very low new issuance. Excluding floating rate issues, only $6.6 billion of new corporate bonds were issued in April, with Canadian banks accounting for $5.3 billion of that total. The corporate sector also benefitted from GE Capital deciding to potentially buy back over $5 billion of its Canadian bonds at premium prices. In anticipation of the early May redemption, holders of the GE Capital bonds scrambled to find reinvestment opportunities, thereby pushing up prices for other corporate issues. The improved risk sentiment in the month benefitted high yield bonds, which gained 2.31% in April. Higher energy prices helped increase interest in inflation protection, and thus Real Return Bonds had much better returns than nominal government bonds, gaining 0.39% in the period. Preferred shares continued to recover in April, gaining 2.96%.

1 2