Canadian bonds, as measured by the FTSE TMX Canada Universe Bond Index, posted a positive return over the period, with all of the index's major sectors posting gains. Although corporate bonds had positive returns, they underperformed the Universe index. Renewed geopolitical tensions in areas of the Middle East put downward pressure on yields but were partially offset by the U.S. Federal Reserve Board's (the "Fed's") tapering of its stimulus measures, as well as ongoing economic improvements in many parts of the world.
The strategy's overweight position in A-rated bonds contributed positively to its performance, as this was the strongest-performing corporate credit quality bucket during the period.
Conversely, the strategy's relatively short duration detracted from its performance over the period.
During the period, we maintained the strategy's overweight position in corporate bonds, while also maintaining its underweight position in Government of Canada issues. We continue to believe that corporate bonds offer relatively attractive risk/reward profiles. At the end of the period, the strategy had an overweight position in the middle of the yield curve, as we believe medium-term maturities also offer relatively attractive risk/return profiles.
Looking ahead, we believe the Fed will wind down its quantitative easing measures before the end of 2014. We also believe that rates at the longer end of the yield curve should rise in anticipation of the end to these easing measures. Markets could be somewhat more volatile in response to elevated macroeconomic and geopolitical risks.
We maintain our positive outlook for corporate bonds and expect spreads to narrow in response to improving fundamentals. We believe the search for yield in this low interest rate environment will continue and that demand for corporate bonds should remain strong. We will remain selective with regard to the strategy's issuer and sector exposures.