Dec Mullarkey
Managing Director, Investment Strategy
and Asset Allocation

The U.S. Federal Reserve met this week and, as expected, raised the federal funds rate by 25 basis points (bps). While the Fed’s accompanying statement reads like a legal brief, the color in the ensuing press conference is always more interesting. In this week’s press update, Chairman Jerome Powell made clear that more hikes are in the queue. While he acknowledged we are seeing early signs of disinflation, he also cautioned for the need for “substantially more evidence” that inflation is being corralled.

The market and the Fed remain at odds over the trajectory of rates later this year. While the market expects rate cuts, the Fed suggests it will be patient. In the press conference, Powell elaborated on this by attributing the disconnect to difference views on inflation. While the market sees a smooth path in getting to the Fed’s inflation target, the Fed sees plenty of speed bumps. And only time and more data will change its view.

However, Powell reiterated that “the ingredients for a soft landing are falling into place.” In related moves, the European Central Bank and the Bank of England both raised rates by 50 bps as they too look to flatten pesky inflation.

Source: U.S. Federal Reserve, 2023. 

Linda Kong Ting
Senior Director and Credit Analyst,
Asset Management

U.S. investment grade (IG) corporate bonds had a strong start in January, with returns of 4% for the month. With such strong sentiment, the new issue market was active and bonds were eagerly received across the capital structure. Therefore, January was more notable for what did not come to market: domestic green bonds. Although at least six large issuers came to market with green bonds in U.S. dollars, just one was a U.S.-domiciled – a regional bank. While this lone domestic green bond did perform well, it did not notably outperform another “regular” tranche from the same issuer.

This suggests a number of shifts in U.S. corporate bond markets. While international investors remain concerned about environmental, social and governance (ESG) factors in investing, it appears that domestic issuers are wary of segmenting the market at a time when liquidity can dry up quickly. On the buy side, this segmentation results from questions around whether green bonds constitute “sufficient” attention to ESG, the traditionally lower liquidity of green bonds in the context of a fundamentally more volatile economic backdrop, greater regulatory scrutiny of ESG claims and the evolving nature of ESG itself. It is likely that issuers will maintain or even expand disclosure of ESG-related data, but a real resurgence in domestic green bond issuance may require improved liquidity conditions together with more sustained overall fixed income performance.

Source: Bloomberg, 2023.

Andrew Kleeman
Senior Managing Director, Head of Corporate Private Placements

IG private credit professionals are back at their desks this week after the annual conference last week. While we have been reviewing and circling deals since early January, the conference is considered the “kickoff” for the year. Despite economic headwinds and still-hawkish central banks like the Fed, the tone of the meetings was optimistic ­– or maybe relieved that 2022 was better than anticipated! Takeaways for the year are expected solid issuance, more cross border and structured transactions, and increasing competition for deals. Our goal this year, and every year, is to provide our clients with the best relative value in the market through diligent underwriting and a strong origination effort that leverages our credit and structuring expertise.

John Bichajian
Senior Director, Derivatives &
Quantitative Strategy

The Canadian Dollar Offered Rate (CDOR), which was originally developed in the 1980s as the basis for pricing credit facilities related to bankers’ acceptances (BA), has more than C$20 trillion of gross notional exposure within the Canadian financial system referencing it, with the vast majority linked to derivatives.

Many market participants likely remember the scandal related to manipulation of the London Interbank Offered Rate (LIBOR) that plagued the financial sector in 2012, resulting in banks receiving over US$10 billion dollars in fines as well as jail sentences for several implicated traders. The scandal resulted in a shift in the U.S. from LIBOR, which relies on subjective judgment of a handful of individuals at certain banks, to the Secured Overnight Financing Rate (SOFR), a market-based rate that is derived from the overnight repo market. Canada is in the process of making a similar shift, which will include the removal of the BA product.

CDOR, which has been the primary interest rate benchmark in Canada for decades, will cease to be published starting in June 2024, with the majority of new derivatives shifting from CDOR to the Canadian Overnight Repo Rate Average (CORRA) this summer. The current year will see large changes in Canadian markets, as the end of CDOR will have significant implications for the Canadian fixed income market, the mortgage/consumer loan industry and investment companies and advisors.

Source: Bank of Canada, 2023.

Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not  constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted here.



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