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Bonds See Bifurcated Returns

The Canadian bond market saw bifurcated returns in the third quarter, says Hugues Sauvé, senior vice-president, fixed income, and executive assistant to the Canadian investment officer, in an Optimum Asset Management ‘Financial Outlook.’ Short-term notes had negative returns because of central bank rate hikes, whereas medium- and long-term maturities performed better. The Universe Index, which includes all maturities, was up 0.52 per cent on the quarter. He says its analysis shows the “Canadian bond market’s outperformance relative to that of the United States is symptomatic of our fragile domestic demand, compounded by global commodity weakness.” This outperformance will be difficult to maintain in the current context and he expects the Canadian dollar to weaken further in order to offset any new adverse events that may affect the Canadian economy. Even though the market’s decline has been fairly orderly, volatility is very high and liquidity is diminishing. “We have flirted with a financial debacle several times (Credit Suisse, United Kingdom, and Italy), and, with the U.S. dollar’s uptick of five per cent, we expect things to get worse before they get better,” he says.

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