Download Canadian Fixed Income 2017 Outlook

January 11, 2013
December 2016
Canadian Fixed Income 2017 Outlook
PERSPECTIVE FROM FRANKLIN BISSETT INVESTMENT MANAGEMENT
Tom O’Gorman, CFA
Senior Vice President
Director, Fixed Income
Franklin Bissett Investment
Management
Darcy Briggs, CFA
Vice President, Portfolio Manager
Franklin Bissett Investment
Management
Lower for longer in 2017
Canadian economic growth disappointed for much of 2016 as the desired rotation to investment
and exports failed to materialize as expected, even with the help of a weaker Canadian dollar.
However, growth did manage to improve over the course of the year, although at the time of
writing, the economy had not yet begun to benefit from the federal government's injection of fiscal
infrastructure spending.
Despite the positive equity and credit market environment in 2016, many global government bond
markets established new historical low levels in terms of yield, as low or negative central bank
policy rates were employed to counter sluggish economic activity and benign global inflation.
Towards year-end, however, yields began to rise as perceptions that central banks may have
reached the limits of their ability to influence economic activity led to calls for more extensive
fiscal stimulus. This trend was further supported by the election of Donald Trump in the United
States.
Another sustained move lower in the price of crude, a decline in exports or poor results from the
government's fiscal stimulus program could prompt further interest rate action from the Bank of
Canada (BoC), which would likely steepen the curve in the process. However, given central bank
positioning, global yield convergence and the general global macroeconomic and political
environment, we still expect Canadian rate markets will remain largely range-bound in 2017.
Constructive on Credit
Credit spreads tightened considerably in the latter half of 2016, a trend supported in part by a lack
of new supply from Canadian issuers and by demand from international investors. These
investors, especially in regions with negative yields, have shifted allocations toward positiveyielding “safe haven” North American markets, increasing demand for both U.S. and Canadian
corporate bonds.
In terms of valuation, spread as a percentage of total yield for Canadian investment-grade credit
remains high, although it has come down from extreme levels seen in early 2016. We believe
credit spreads still provide a reasonable amount of cushion against potential credit deterioration or
a further increase in interest rates. While acknowledging the advanced state of the credit cycle, we
remain constructive on credit given the strong supply versus demand dynamic, supportive
valuations and reasonable fundamental backdrop.
We expect global uncertainty will lead to bouts of periodic volatility. Potentially disruptive factors
include:
• Divergence between the market and the US Federal Reserve's rate-path expectations;
• The United Kingdom's impending exit from the European Union, which is an untested process;
• Uncertainties posed by the surprise victory of Donald Trump in the November presidential
election.
Given potential changes in political direction in countries accounting for approximately 40% of the
world’s gross domestic product, we expect the heightened uncertainty could weigh on global
economic activity, with reduced consumer and business confidence potentially leading to
postponement of business investment and consumer spending. As active managers, we will be
closely monitoring these and other developments with the dual objectives of preserving value for
our investors and taking advantage of opportunities as they arise.
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IMPORTANT LEGAL INFORMATION
The information presented herein is considered reliable at the present time, however, we do not represent
that it is accurate or complete, or that it should be relied upon as such. Speculation or stated beliefs about
future events, such as market and economic conditions, company or security performance, upcoming
product offerings or other projections represent the beliefs of the authors and do not necessarily represent
the views of Franklin Templeton Investments Corp. General business, market, economic and political
conditions could cause actual results to differ materially from what the authors presently anticipate or project.
The information presented is not a recommendation or solicitation to buy or sell any securities. Franklin
Bissett Investment Management is part of Franklin Templeton Investments Corp.
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