Bond Fund Commentary
Portfolio Advisor: Industrial Alliance Investment Management
Inc.
Fund Commentary - June 30, 2010
Interest rates on Canadian government bonds have decreased
significantly with the general movement away from riskier assets
during the first half of 2010. Long-term interest rates have come
down, flattening the Canadian yield curve, as inflation
anticipations have dissipated because of increased concerns
regarding the sustainability of the global economic recovery. The
Bank of Canada raised short-term interest rates by 25 basis points
to 0.50% at the end of the period, however rates still remain low
by historical standards.
Ten-year Canadian government bond yields have gone from 3.7% to
3.1% since the start of the year. The more yields decline the
better the performance of a bond on the secondary market.
Portfolio Managers who favoured longer-term maturities during
the period would have fared better than those who anticipated on
shorter term rates, since the performance of long-term bonds rose
7.8% whereas that of mid and short-term bonds rose 5.0% and 2.2%,
respectively.
The Fund lagged the benchmark's return during the first half of
2010. The Fund's underweight of Federal bonds detracted from
performance in the second quarter of 2010. Government fixed income
securities outperformed due to the uncertainty that has developed
in financial markets. The Fund has had an overweight position in
corporate bonds which was profitable during the first quarter of
2010 but has detracted from performance over the last three months.
The Fund's yield curve positioning underperformed, especially in
the 10-year term. The cash component of the Fund has also detracted
from performance, given the low yields of money market securities.
The Portfolio Advisor lowered the duration of the Fund over the
last quarter.