Bond Pool Quarterly Review
For the period ending
June 30, 2010
Substantially lower government bond yields helped the DEX Universe Index produce a healthy return of 2.9% in the quarter, as risk aversion once more infiltrated the market. Despite this shift in attitude, corporate bond yields held in fairly well with positive returns, albeit returns that were less than for government bonds.
Our overweight to the corporate sector, in particular the financial area, was the prime reason for our underperformance in the quarter.
FIXED INCOME REVIEW & STRATEGY
During the second quarter of 2010, the duration of the portfolio was maintained fairly close to the index, except for two occasions. On each occasion (in May and June), we employed a tactical strategy that took advantage of a temporary rise in short term bond yields. A marginal reduction in duration was effected by selling short-dated bonds and buying even shorter-dated securities and floating rate notes. Portfolio duration was returned to close to the index by the end of the quarter, with the outcome of this strategy proving beneficial to performance. Currently, Government of Canada bond yields appear to be much less compelling at these lower levels relative to our expectations for further – albeit modest – Bank of Canada rate hikes over the next 12 months.
Although our overweight position in corporate bonds negatively impacted performance in the second quarter of 2010, we have maintained this overweight in order to generate higher portfolio yield than the index.
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