Portfolio returns: Q1 2025
| Total Return | 1M | 3M | YTD | 1YR | 3YR | 5YR | 10YR | Since Inc. (Jan 30, 2023) |
IG Graduation Portfolio F | 0.21
| 1.61
| 1.61
| 7.53
| 5.58
| |||
Quartile rankings | 4 | 2 | 2 | 1 |
IG Graduation Portfolio Series F
Portfolio commentary
Q1 2025
Highlights
① The portfolio posted a positive return over the quarter as yields across the curve moved lower led by shorter-term yields in Canada.
② Corporate bonds were the largest driver of the portfolio’s performance during the period.
③ Bonds in the financials and energy sectors drove returns.
Portfolio Overview
The first quarter of 2025 was marked by the transition in the U.S. from the end of the Biden administration to the beginning of the Trump administration. Understandably, there was some trepidation in markets ahead of this due to months of threats around immigration policies and pending "day 1" tariffs. The new administration did not disappoint, with the president signing more Executive Orders in his first one hundred days than any president in history. Most concerning for markets is the threat of tariffs and what that can lead to – inflation, economic slowdown, dysfunctional supply chains and unemployment. Of course, most concerning to us is the threat of tariffs on Canada. In the end the threat was largely toothless, with 25% tariffs being implemented not once but twice and then immediately paused. This left the threat of future tariffs hanging over Canada and the world, and that type of news flow and uncertainty is not without consequences with investors getting cautious on risk – both equities and corporate bonds – in favour of government bonds.
In Canada, yields on 2-year, 5-year, 10-year and 30-year government bonds fell 47bps, 35bps, 26bps and 11bps respectively, significantly bull-steepening the curve. Similarly in the U.S., these same tenors fell 36bps, 43bps, 36bps and 21bps. In terms of credit, the U.S. CDX Investment Grade Index – which had stubbornly refused to widen despite Trump’s electoral success and threats of disruption – finally gave up, widening from sub-50 to over 60.
The FTSE Canada Short Term Bond Index achieved positive returns for the quarter.
The portfolio's performance was positively influenced by its allocation to investment-grade corporate bonds. Notably, corporate bonds in the financials and energy sectors drove gains during this period. However, exposure to government bonds had a negative impact on performance.
The fund ended the period with an overweight allocation to corporate bonds at 62.5% and an underweight allocation to government bonds at 32.7%. During the period, the fund increased its allocation to the energy sector and decreased its allocation to the financials and communication services sectors.
Market overview: increased uncertainty in U.S. markets favoured international equities
Investor sentiment turned cautious in the first quarter of 2025, driven by heightened market uncertainty following significant shifts in U.S. trade policy under President Trump. Abrupt tariff changes targeting major trade partners — notably Canada, Mexico and China — increased volatility and pressured equity market performance, particularly affecting the S&P 500 Index. In contrast, European markets outperformed significantly, reflecting investors' preference for Europe's attractive valuations and perceived stronger growth potential.
Despite trade-related headwinds, global manufacturing activity showed resilience, signalling potential earnings growth ahead, provided trade tensions stabilize. Central banks diverged in response: the Bank of Canada proactively lowered its overnight rate to 2.75% to bolster growth amid trade uncertainties, while the U.S. Federal Reserve maintained its rate at 4.5%, viewing tariff-related inflation impacts as temporary.
Market outlook: the outlook can be described as uncertain
The outlook can only be described as uncertain. The U.S. administration has suggested various reasons for tariffs – border security, reciprocity, to correct trade imbalances – and so what will actually be implemented and how they can be mitigated remains unclear. Risk appetite therefore remains low generally in the market and volatility remains high. Overall, the market remains fragile, and a fragile market can lead to pockets of illiquidity.
We remain cautious of what is currently unclear and continue to consider multiple possible future paths. In particular, should tariffs be implemented and should this be the beginning of either a short-term or longer-term trade war, what will the outcome be for inflation. While tariffs are generally thought to be inflationary – at least in the short term – will the over-riding reaction be demand destruction and a global slowdown? Q2 2025 promises to be equally interesting.
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