Portfolio returns: Q4 2024
| Total Return | 1M | 3M | YTD | 1YR | 3YR | 5YR | 10YR | Since Inc. (Jan 30, 2023) |
IG Graduation Portfolio F |
0.43
|
0.92
|
6.44
|
6.44
|
5.44
|
|||
Quartile rankings |
1 |
2 |
1 |
1 |
IG Graduation Portfolio Series F
Portfolio commentary
Q4 2024
Highlights
① The portfolio posted a positive return over the quarter as short-term bond yields were stabilized by supportive monetary policy.
② Corporate bonds had the greatest impact on the portfolio’s performance during the period.
③ Bonds in the financials sector drove strong returns as spreads moved tighter during the period.
Portfolio Overview
Unsurprisingly, U.S. political events were the primary focus for fixed income markets during the fourth quarter of 2024. Despite a surge in excitement in favour of Kamala Harris after President Biden stood aside earlier in the year, polling, and particularly betting markets, moved more in favour of a Trump/Republican win as the year rolled on, correctly predicting the outcome of the early November election. Markets moved in lockstep, aiming to decipher what a Trump win and possible Republican sweep would mean. Against this backdrop, the two policies markets are most focused on and concerned about are deficit spending and tariffs.
The concerns over unfunded tax cuts drove yields higher led by the back end of the curve – steepening the curve marginally in the process. 5y, 10y and 30y UST rose 87.2bps, 83.8bps and 71bps respectively, whereas 2y UST rose 62.8bps. Tariff concerns were most evident in currency markets with the U.S. dollar performing well, particularly against currencies most at risk of the most substantial tariffs – Mexico and Canada.
The FTSE Canada Short Term Bond Index achieved positive returns for the quarter.
The portfolio’s allocation to investment-grade corporate bonds positively impacted its performance. Specifically, holdings in corporate bonds within the financials and energy sectors contributed to the gains during this period. Exposure to government bonds detracted from performance.
The fund ended the period with an overweight allocation to corporate bonds at 63.7% and an underweight allocation to government bonds at 33.4%. During the period, the fund decreased its allocation to the communication and energy sectors and increased its allocation to the real estate sector.
Market overview: the U.S. dollar and equities dominated the quarter
Investor sentiment turned optimistic in the fourth quarter of 2024, as equities rallied to close the year on a high note. Three defining themes shaped the quarter: a historic U.S. presidential election, ongoing central bank rate cuts and a rise in political risks both domestically and abroad. Collectively, these factors drove market movements, creating an optimistic and rewarding environment for investors following the decisive U.S. election.
Global central banks continued to ease their monetary policies, shifting the focus from combating inflation to supporting economic growth and labour market stability. The Bank of Canada (BoC) cut its overnight rate twice by 50 basis points (half a percentage point) each time, for a total reduction of one percentage point during the quarter, bringing the overnight rate to its lowest level in over two years. Similarly, the U.S. Federal Reserve followed its September cut with two consecutive reductions of one-quarter percentage point each.
Market outlook: attractive opportunities in Canadian fixed income
Politics remain front and center with the new U.S. administration taking power. Any tariff would of course be problematic for Canada. Retaliatory action would be inflationary and any support by the Bank of Canada via increased rate cuts would weaken the currency and also be inflationary. The path of longer end rates remains especially uncertain. 30y Canadian yields are now 150bps lower than 30y U.S. yields. Any increase in inflation would make the sector relatively unattractive to own. It is unclear how attractive investing in Canada would be if it is in the midst of a prolonged trade war with its biggest trading partner.
At current valuation, we consider the corporate bond market expensive. Given this and until there is more clarity on the geopolitical situation between Canada and the U.S., we see no reason to increase credit holdings and would look to improve credit quality and liquidity.
To discuss your investment strategy, speak to your IG Advisor.
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