Monthly commentary discusses recent developments across the Diversified Bond, Alternative Credit Opportunities and Credit Income Opportunities Funds.
Since the better-than-expected October US inflation numbers, markets have rallied across the board and now seem to discount much better odds of a soft landing (i.e. Central banks successfully bringing inflation back under control without triggering a recession). While a soft landing would be very constructive for risk assets generally (see our October Monthly Commentary for our 2023 outlook and scenario analysis), we remain of the opinion that 400bps of rate hikes in less than a year, the fastest hike cycle since the 1980s, is bound to have repercussions for the real economy.
Indeed, our yield curve recession forecasting model is now flashing red, with odds of a U.S. recession over 60% for the next 12 months (Figure 1 below, yellow shading indicates recession). Historically, inversions of this magnitude (10-year minus 3-months was -71bps at the end of November) are very rare and have always preceded recessions (1973, 1979, 1981 and 2000). At the risk of sounding like a broken record, monetary policy acts with long and variable lags, and given the pace of this hike cycle, we have yet to feel its impacts.
Thankfully, with goods inflation turning into deflation and housing clearly decelerating, overall inflation has most probably peaked. At this juncture, the last piece of the inflation puzzle remains the labour market, where wages are still too high due to a shortage of workers. Therefore, wages will likely remain a source of upward pressure for inflation for the foreseeable future. That is why the Fed and the BoC will be reluctant to cut interest rates any time soon. Yes, we are very close to the end of the hiking cycle, but unless the unemployment rate starts increasing rapidly, that doesn’t mean that rate cuts will follow shortly thereafter.
As mentioned above, November was undoubtedly a good month for risk assets. The S&P 500 rallied almost 6% for the month while the US Investment Grade Corporate Bond Index tightened by 24 bps. Canada lagged the move in US credit spreads but still tightened a very material 15 bps. For context, the rally in Canadian credit spreads in November was the largest of the year, with the telecommunication and pipeline sectors outperforming. The strong tone in risk coupled with lower government bond yields led to a busy month in primary markets as all-in coupons were far more attractive for issuers. November saw $14.5bln of new corporate supply in Canada with the bulk of issuance being of the corporate variety (i.e. non-financial). This marks the second busiest month in corporate supply for the year. Broadly speaking, all new issues built strong books which performed well once trading began in secondary markets. As has been our playbook for many years, we took advantage of the busy new issue market to opportunistically add to credits we like. So far in December, primary markets have slowed down and we would expect this to remain the case heading into the calendar year-end.
We continue to thread carefully, high grading portfolios where we can and avoiding companies that we think could struggle in a more challenging macroeconomic environment in 2023. Our allocation to high yield should continue to decline and overall portfolios duration will increase.
We took advantage of the strong rally in the telecommunication sector to take some profits within the sector. We participated in the SNC-Lavalin new issue after gaining additional confidence in the de-leveraging story while viewing the short tenor and high coupon as an attractive fit to the portfolio. As of month-end the funds yield-to-maturity was 7.5% (up slightly from 7.3% last month) while duration was largely unchanged at 3.4 years.
We took advantage of the strong rally in the telecommunication sector to take some profits within the sector. We participated in the SNC-Lavalin new issue after gaining additional confidence in the de-leveraging story while viewing the short tenor and high coupon as an attractive fit to the portfolio. We also participated in the Coast Capital new issue as the deal came with a generous spread for the credit rating in addition to issuing on an attractive part of the Government of Canada yield curve. As of month-end the funds yield-to-maturity was 10.4% while duration was 2.4 years, both of which largely unchanged month over month. While we brought down leverage in October, it remained flat at 1.1x in November which served the portfolio well given the rally in credit spreads.
We took advantage of the strong rally in the telecommunication sector to take some profits within the sector. We participated in the SNC-Lavalin new issue after gaining additional confidence in the de-leveraging story while viewing the short tenor and high coupon as attractive. We also participated in the Penske Truck Leasing new issue which we viewed as a solid addition to the portfolio, particularly via its diversification benefits. As of month-end the funds yield-to-maturity was 11.3% while duration was 2.4 years, both of which largely unchanged month of month. While we brought down leverage in October, it remained flat at 1.2x in November which served the portfolio well given the rally in credit spreads.
As this is our last official communication for 2022, we’d like to thank investors and other stakeholders for their support this year. It has been a very volatile and challenging year, and we hope everyone will be able to enjoy some much-needed downtime during the last few weeks of 2022. Wishing everyone happy holidays and a prosperous new year.
Please reach out to discuss further.
Until next month,
Mark, Etienne & Nick
1 All Ninepoint Diversified Bond Fund returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at November 30, 2022 1 All Ninepoint Credit Income Opportunities Fund returns and fund details are a) based on Class F units; b) net of fees; c) annualized if period is greater than one year; d) as at November 30, 2022. 1 All Ninepoint Alternative Credit Opportunities Fund returns and fund details are a) based on Class F units; b) net of fees; c) annualized if period is greater than one year; d) as at November 30, 2022.
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