A Fixed Income Solution in a Rising Rate Environment

This year has been challenging for investors as markets grappled with persistent and elevated inflation, hawkish monetary policies by many central banks, and geopolitical tension between Russia and Ukraine, along with supply chain issues related to COVID-19.

The rise in interest rates this year has been especially challenging for fixed income investors as the broad Canadian fixed income market, represented by the FTSE Canada Universe Bond Index, had the worst eleven-month start in 40+ years, with a loss of 11.8% year to date (YTD).

The overnight rate in Canada surged from 0.25% at the beginning of 2022 to 4.25% with the recent 50-basis-point hike at the December 7^th meeting:

https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

Most of the drawdown YTD in the Canadian fixed income market has been duration related; the longer the duration, the higher the drawdown with yields rising across the yield curve. The chart below shows that YTD, the ultra-low duration government bond index has been much more defensive, minimizing drawdown during times of volatility compared to other government bonds with higher duration in Canada.

We have also seen a close relationship between the Yield-To-Maturity and one-year forward return for ultra-short-term bonds based on the ICE BofA 0-1 Year Canada Government Bond Index. This is important for investors who want to capture higher yield without increasing too much volatility in a portfolio.

The following chart shows the shape of the Canadian yield curve as of November 30, 2022, compared to the end of 2021. With an inverted curve, yields are now much higher at the front of the curve than in the belly and at the long end. Hence, investors are not rewarded with the term premium to extend maturity, which provides opportunity on the short end of the curve for yield seekers in the current environment.

The value of the FTSE Canada 0-1 Year Universe Overall Bond Index, which includes both investment grade corporate and government bonds, has been moving higher since mid-June despite a number of rate hikes because, first, markets have already priced in most of the near-term rate hikes and, secondly, the Index was able to reinvest in higher yield opportunities as bonds came due since they had short maturities:

The rise in yields now provides attractive income opportunities for investors which we did not see at the beginning of the year. The  Franklin Bissett Ultra Short Bond Active ETF (FHIS) is appropriate for investors seeking an attractive yield with limited interest rate risk and low volatility within the fixed income portion of their portfolios. FHIS has a duration of 0.58 years, YTM of 4.98%, and a credit rating of A, as of November 30.

As an actively-managed strategy, FHIS has the ability to incorporate core and non-core sectors to seize opportunities arising in the bond market. We believe its management fee of 15 basis points is attractive for investors seeking an active, ultra-low duration strategy co-managed by three Franklin Bissett portfolio managers with 15 years of industry experience.

FTSE Global Debt Capital Markets Inc. (“FTDCM”), FTSE International Limited (“FTSE”), or the London Stock Exchange Group companies (the “Exchange”) (together, the “Licensor Parties”). The Index is compiled and calculated by FTDCM and all copyright in the Index values and constituent lists vests in FTDCM. The Licensor Parties shall not be liable (whether in negligence or otherwise) to any person for any error in the Index and the Licensor Parties shall not be under any obligation to advise any person of any error therein.

“FTSE®” is a trademark of FTSE International Limited in Canada and Taiwan, and “FTSE®” is a trademark of the London Stock Exchange Group companies in the rest of the world and is used by FTDCM under license. Broad Composite is represented by the FTSE Canada Universe Bond Index; Long Composite is represented by the FTSE Canada Long Term Overall Bond Index; Mid Composite is represented by the FTSE Canada Mid Term Overall Bond Index; and Short Composite is represented by the FTSE Canada Short Term Overall Bond Index.

Broad All Government is represented by the FTSE Canada All Government Bond Index; Long Government is represented by the FTSE Canada Long Term Government Bond Index; Mid Government is represented by the FTSE Canada Mid Term Government Bond Index; and Short Government is represented by the FTSE Canada Short Term Government Bond Index. Broad All Corporates is represented by the FTSE Canada All Corporate Bond Index; Long Corporates is represented by the FTSE Canada Long Term Corporate Bond Index; Mid Corporates is represented by the FTSE Canada Mid Term Corporate Bond Index; and Short Corporates is represented by the FTSE Canada Short Term Corporate Bond Index.

If a proxy investment is used, the performance is for comparison purposes only. The USD performance has been converted to CAD. This product is not available for sale in Canada. For specific proxy information please refer to the important information pages located in the back of this report. Past performance is no guarantee of future results.

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