Monthly commentary - Mackenzie Fixed Income Team

Written by the Mackenzie Fixed Income Team

Key Highlights

• US Treasuries have historically strengthened during volatile periods, offering reliable safety for investors when needed most. Despite concerns, the US has the tools and political will to support its bond market
• The Bank of Canada has decided to keep interest rates steady, awaiting global policy decisions to guide future actions, reflecting uncertainty in the economic outlook.
• We remain overweight portfolio duration in US Treasuries and reducing credit risk by focusing on higher-rated credits. Exposure is maintained in New Zealand and Indonesian government bonds, with new investments in Brazil, Mexico, and Colombia due to favorable currency conditions.
• Exposure to tariff-sensitive sectors has been reduced, with a shift towards defensive sectors like pipelines, telecoms, utilities, and senior bank debt. The tactical credit risk allocation, enabled our credit portfolios to capitalize wider spreads mid-month and selectively increase risk at attractive valuations for enhanced returns.

Fixed Income Market Update

US Treasuries have historically demonstrated antifragility, meaning that during periods of heightened volatility, they have not weakened but strengthened. This rare characteristic in financial markets has provided investors with reliable safety precisely when it is most needed.

There is growing debate about whether the Federal Reserve might be forced to act like an emerging market central bank, prioritizing inflation credibility or capital flight risks over domestic growth. Despite recent market anxieties, such a shift remains highly unlikely. The US has both the necessary tools and political incentives to defend the integrity of its bond market. The support could flow in part from one or combination of the Fed, US Treasury department, Political leadership. Ultimately, in a world where credibility and liquidity are non-negotiable, policymakers will act decisively, not because they want to, but because the alternative is fundamentally unacceptable. Periods of doubt and volatility are inevitable, but the structural incentives and capabilities to preserve the Treasury market remain overwhelmingly compelling.

For the first time in nearly a year, the Bank of Canada has decided to keep interest rates steady. Heading into the meeting, market expectations were split on whether there would be a rate cut, but the Bank chose to pause, aligning with the slight majority view. This decision wasn't made because the future is clear, but rather because it is anything but. Essentially, the Bank isn't waiting for more data; it's waiting for a global policy decision that will shape the economic narrative for the rest of the year.

Fund Positioning

In the current fixed income landscape, our strategy is centered on a deliberate extension of portfolio duration in nominal US treasuries, reflecting a nuanced regional allocation. Simultaneously, we are prioritizing a reduction in sector specific risk with greater focus toward increasing exposure to higher-rated credits.

We continue to hold our exposure in New Zealand and the rate cut in April supports that view as the central bank views the heightened tariff related volatility to dampen growth and cheaper oil prices to push inflation lower. In the EM space we continue to hold exposure to Indonesian government bonds as the central bank held rates in its April meeting motivated by the need to bolster the currency depreciation. We expect rate cut in its upcoming policy amid faltering growth concerns and managing currency volatility through FX intervention. We have also initiated exposure towards Brazil, Mexico & Columbia as we see these country currencies to benefit from a weaker dollar and rotation of flows into EM assets. Brazil central bank has cumulative tightened 425 bps since Sept’24 raising the Selic rate to 14.75%. We expect reduced pace of rate hikes & lower expected inflation to support the bond prices.

To mitigate risks from trade policy uncertainties, we proactively reduced exposure to tariff-sensitive sectors. This strategic move enabled our credit portfolios to capitalize on wider spreads, which exceeded their long-term averages mid-month. By selectively increasing risk at these attractive valuations, we positioned the portfolios to capture enhanced returns. This has added resilience across mandates with overweight corporate exposures amid higher rates volatility. The economic backdrop remains weak, and we have actively de-risked by trimming exposures in Canadian energy, retail, such as consumer discretionary, industrials, and automotive, and even our long-held subordinated bank debt. Our credit remains concentrated in more defensive sectors: pipelines, telecoms, utilities, and core senior bank debt. In the US, we pre-emptively lowered exposure to sectors heavily tied to government spending, including healthcare, pharma, and technology. These adjustments aim to insulate the portfolio from volatility tied to geopolitical developments. Meanwhile, we maintain a neutral position in leveraged loans, reflecting a cautious yet balanced approach to this segment of the market.

Credit Market Performance

April was a tale of two halves for investors with Trump’s liberation day announcement sparking recession fears only to be followed by a de-escalation phase of the global trade war. The credit space was jolted by early announcement of sweeping tariffs on goods from a range of countries, triggering the sharp spike in volatility. As a result, the new issue market virtually shut down during the month. The prices recovered in the final week of the month to largely end flat led by de-escalation in the trade policies. We continue to witness dispersion in the credit space with the HY index providing a +1.0% gain ytd, with BBs (+1.8%) outperforming Single Bs (+0.8%) and CCCs (-1.0%). Sector dispersion was elevated with Telecom (+3.3%) and Food/Bev. (+2.9%) and lagging within Consumer Products (-1.77%) and Energy (-1.60%).

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