Outlook
The outlook for the Canadian bond market has been altered by the economic implications of the COVID-19 pandemic. The pandemic caused economic activity to grind to a halt in the first quarter. In response, global central banks lowered interest rates and injected monetary stimulus into the economy. These factors have led to two primary outcomes relevant to the bond market. First, interest rates around the world dropped significantly, a positive for bond performance. Second, although credit spreads had widened significantly in the first quarter, they have since narrowed, allowing the performance of the corporate bond sector to recover, also a positive for bond performance. These two factors have driven the healthy performance year to date. Looking forward, heightened economic uncertainty means global interest rates are likely to remain low for a significant period; a positive for the bond market. Global Central's banks have committed to leaving their overnight rates unchanged which gives this outcome a high probability. The predominant risk is a resurgence of COVID-19 cases causing a delay in the re-opening of the economy and credit spreads to widen, or at least remain volatile. Overall, the bond market continues to be a haven for investors seeking preservation of capital and as a risk management tool, offsetting the volatility within the equity portion of their portfolio.