Portfolios: Desjardins Global AM: Favoring Provincial Bonds

By Yali N'Diaye

     OTTAWA (MNI) - With bond markets turning the corner as monetary policy

normalization is taking place and changing the supply-demand balance, leading to

higher yields in developed markets, Desjardins Global Asset Management is

responding by reducing duration.

     Christian Duceppe, who heads investments for fixed income mandates,

corporate credit, infrastructure investments and private placements, told MNI he

is also shifting Canadian bond allocation towards provincial bonds, which have

been underperforming since the beginning of the year.

     He added that increased market volatility is driving him towards more

liquid bonds, hence his preference for provincial bonds over corporates.

     --BC, QUEBEC, ONTARIO

     Among provinces, he favors British Columbia, followed by Quebec and

Ontario, the two latter representing the manufacturing heart of the country.

     Ontario being a larger exporter to the U.S. than Quebec, the province

should be more impacted than Quebec should the NAFTA renegotiations fail, which,

however, is not his base case scenario.

     As a result, he has a slight preference for Quebec over Ontario.

     Other provinces are underweight, if owned at all.

     The portfolio manager is instead reducing exposure to corporates, which is

concentrated in investment grade, as the priority is given to liquidity.

     In the search for liquid bonds, Marie-Claude DesRoches, who leads the

fixed-income credit analysis team, said she favors senior banking debt over

subordinated debt as she expects increased market volatility.

     --BOC, FED TIGHTENING

     The macroeconomic background should support further monetary policy

normalization in both the U.S. and Canada.

     Duceppe's growth expectations are within the range of the Bank of Canada's

projections. He expects Canadian real GDP to expand by 2.0% to 2.5% this year,

compared to the BOC's 2.2% projection.

     He assumes a U.S. GDP growth of 2.5% to 3.0%, compared to 2.6% for the BOC.

     Canadian inflation should be close to 2% this year, he said, although he

keeps a close eye on wage growth, which is already on an upward trend.

     Despite this supportive backdrop, the BOC should hike just twice this year,

with the next hike in the summer, while markets are expecting more than two

hikes.

     --FURTHER CURVE FLATTENING

     Duceppe expects the yield curve to continue to flatten both in the U.S. and

in Canada, but not to the point where it would invert.

     He sees the U.S. 10-year yield rising a further 25 to 50 basis points by

the end of this year, as the Federal Reserve's demand for bonds diminishes with

QE tapering, while the larger U.S. fiscal deficit translates into higher supply.

     Canadian yields should follow up, but to a lesser extent, outperforming the

U.S. bond market, he expects.

     The U.S. 10-year yield was trading around 2.86% Friday afternoon, and the

Canadian counterpart was trading at 2.25%.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$,M$$FI$]