The DEX Universe Bond index returned 0.69% during this quarter, with all quality segments gaining. Corporate bonds returned 1.52% during the quarter, outperformed both DEX Universe (0.69%) and Broad Government Index (0.37%) by 83 basis points and 115 basis points, respectively.
The increased risk tolerance was felt across the credit curve, with Corporate BBB leading the All Corporates at 2.18%, followed by Corporate AAA/AA and Corporate A buckets at 1.25% and 1.23%, respectively.
Recent statements from monetary officials suggest that interest rate hikes are off the table for the foreseeable future in both Canada and the United States. As a result, demand for corporate issues remained high, buoyed by investors who stretch for higher yields.
At the start of Q1 2013, the fund was positioned with a neutral duration and ended the quarter with a short duration of 0.5 years compared to the DEX Universe Bond Index. Over the period, the Fund tactically decreased duration during the quarter in response to improving U.S. fiscal policy uncertainties and better global growth outlook.
The Fund continued its overweight to Western Provinces as a reflection of the relatively stronger fiscal position of these provinces and as a hedge to any provincial spread widening. In Q1 2013, the portfolio remained overweight in the Corporate and Provincial sectors. The Fund opportunistically increased its corporate sector weighting. Within the Corporate sector, the Fund was overweight in Financials, Energy and Industrial sectors.
Looking ahead, we expect rates to stay pressured on both sides of the border given the tepid pace of economic recovery in North America and a still challenged labor market. Within the Canadian bond market, due to the relative economic stability and ongoing corporate demand/supply disequilibrium, we maintain a constructive view on credit. At the same time, we continue to exercise caution and remain selective from both credit and sector exposure perspective, as exogenous risks stay elevated.