Transcript Presentation

Canadian Bond Market Presentation
January 18, 2011
John Braive, Vice-Chairman
CIBC Global Asset Management Inc.
CONFIDENTIAL
Market Review
 Key Developments (Q4’10)
• BoC on hold at 1.00%, but the market’s priced for hikes to resume in May 2011. We expect no further
action until H2’11. No Fed Funds hike expected until 2012.
• Longer-term yields rose in response to evidence that the economy had avoided a double-dip recession
and due to rising concerns that the Fed’s second round of quantitative easing would lead to higher
inflation.
• Yield curve has flattened modestly since end of Q3, as 2-year yields rose 30 bps, while 30-year yields
rose 18 bps, reflecting rising inflation fears and a resumption of the “risk on” trade.
• Corporate bonds outperformed GoC and Provincial bonds, given their shorter duration and stable
spreads. However, all had negative returns for the quarter.
• DEX Corporate Spread narrowed 2 bps, to 138 bps; up 3 bps YoY. DEX Provincial spread narrowed 2
bps, to 118 bps; down 10 bps YoY. Investors remain hungry for yield.
• New issue activity remained strong with total issuance during the quarter at $20.9 BN, with YTD at
$82.9 BN vs $60.7 BN for same period in ’09. Issuance was higher that seen in 2009 and 2008.
Source: CIBC Global Asset Management Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 1
Market Review
 Yields – short-term rates up, long-term yields stable
5.0
March 2010
4.0
June 2010
December 2010
3.0
September 2010
2.0
1.0
0.0
0 yr
5 yrs
10 yrs
15 yrs
20 yrs
25 yrs
30 yrs
• Yields rose in Q4 as QE2 started, increasing inflation fears and encouraging the
“risk on” (sell bonds / buy stocks) trade.
Source: CIBC Global Asset Management Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 2
Market Review
 Yield Curve – Still steep, but flattening trend started
• The yield curve flattened further in the quarter as longer-term yields rose less than shorterterm yields rose as QE2 began.
• The steep curve anticipates tightening by the Bank of Canada in 2011.
• Current steepness of the yield curve provides resistance to long rates rising significantly.
CIBC Global Asset Management Inc.
Source: PC Bond, a business unit of TSX Inc.
CONFIDENTIAL
| Page 3
Market Review
 Credit - Corporate Yield Spread
Dec 31 ’10 +138 bps
Low: Jan 31, ’86 +28 bps
High: Dec 29 ’08 +366 bps
Avg: +95 bps
• Spreads are still near prior credit crisis levels, and were largely unchanged for the year.
• We expect continued volatility, but remain overweight given expectations that corporate bonds
will outperform government bonds over the next year.
Source: PC Bond, a business unit of TSX Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 4
Market Review
 Credit – Corporate Bond Issuance
Canadian Corporate New Issuance ($millions)
$100,000
$94,700
$89,094
$82,882
$80,000
$61,359
$60,669
2008
2009
$60,000
$40,000
$20,000
$2006
2007
2010
Source: CIBC Global Asset Management
• Q4 supply was robust at $20.9, and was $82.9 BN in ‘10 vs $60.7 in ’09.
• Maple bond issuance returned, with $4.4 BN in ‘10 issuance surpassing 2009 levels, but well
below the ~$25BN level seen in each of ’06 and ‘07.
• Canadian banks were busy issuing in Canada and the U.S.; $26.8 BN issued domestically in ‘10.
• The calendar was well managed, helping to keep spreads stable.
CIBC Global Asset Management Inc.
Source: PC Bond, a business unit of TSX Inc.
CONFIDENTIAL
| Page 5
Market Review
 Credit – Tier 1
• Basel III will likely result in the early call of only those Tier 1 bonds with maturity
dates after 2023. We don’t hold them in the Model Accounts.
• Outstanding Tier 1 and older subordinated debt will likely lose capital treatment on a
straight-line basis from 2013 – 2023. But they are not expected to be called.
• Basel III subordinated debt issuance will likely resume.
CIBC Global Asset Management Inc.
Source: PC Bond, a business unit of TSX Inc.
CONFIDENTIAL
| Page 6
Market Review
 Credit - Long Provincial Yield Spread
Dec 31 ’10 +81 bps
Low: May 22 ’07 +38 bps
High: Mar 6 ’09 +153 bps
Avg: +67 bps
• Long-term provincial spreads tightened (-6 bps to 81 bps in Q4) in the search for yield and
longer-duration assets.
• Overall, provincial spreads tightened 2 bps in the quarter to 118 bps; down 10 year/year.
• Long-term provincial spreads look expensive as compared to corporates.
Source: PC Bond, a business unit of TSX Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 7
Canadian Fixed Income
 Sector Returns – DEX Universe Bond Index
1 year – As at December 31, 2010
Quarter – As at December 31, 2010
Corporate
Provincial
8.2%
Corporate
-0.7%
Overall
8.6%
Municipal
-0.6%
Municipal
Federal
Provincial
-0.5%
7.3%
Overall
-0.7%
Federal
-0.9%
6.7%
5.4%
Source: PC Bond
DEX Universe Bond Index is a trademark of TSX Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 8
Portfolio Returns
 Periods ending December 31, 2010
CIBC Bond Fund - 29901*
QTD
(%)
1 YEAR
(%)
4 YEARS
(%)
Portfolio
-0.54
8.42
6.12
Benchmark
-0.71
6.74
5.56
0.17
1.68
0.56
Added Value
* Returns are before fees
In Canadian dollars
Source: CIBC Global Asset Management Inc.
Performance is shown before management and custodial fees
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 9
Canadian Fixed Income – Active Management
 Attribution – 12 months ending December 31, 2010
Value Added Activity
Strategy in Period
Duration
Long
Sector Allocation
Underweight Gov’t of Canada
Term Structure
Curve to stay steep (bullet)

6
Carry
Overweight Corproates

78
Security Selection
Higher beta names

CIBC Global Asset Management Inc.
Impact
Basis Points

29

Represent characteristics of CIBC Pooled Fixed Income Fund – 80020
Source: PC Bond and CIBC Global Asset Management Inc.
CONFIDENTIAL
13
42
| Page 10
Economy – National Bureau of Economic Indicators
U.S. Personal Income Less Transfers
U.S. Nonfarm Payroll
U.S. Personal Income
less
Transfers
Expansion
vs. Average Expansions
Current
vs.
Average
Expansions
U.S. Nonfarm
Payroll
Average Expansions
Current
vs. Expansion
Average vs.
Expansions
105
105
104
104
Assuming recession ended in June 2009 (=100)
103
102
Assuming recession ended in June 2009 (=100)
103
102
101
101
100
100
99
JUN 07
DEC 07
JUN 08
DEC 08
JUN 09
DEC 09
JUN 10
DEC 10
JUN 07
DEC 07
JUN 08
Current Expansion of Personal Income less Transfers
Average Expansions
DEC 08
JUN 09
DEC 09
JUN 10
DEC 10
Current Expansion of Nonfarm Payrolls
Average Expansions
Source: Datastream & CIBC Global Asset Manag ement Inc. Calculations
Source: Datastream & CIBC Global Asset Manag ement Inc. Calculations
• Both income growth and employment are tracking well below prior recoveries.
• Lack of income growth is a serious headwind.
• In spite of massive fiscal and monetary stimulus, the economy is expanding well below historic trends.
Source: Datastream and CIBC Global Asset Management Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 11
Economy – Housing
U.S. Months'
SupplyofofExisting
Existing Homes
U.S. Months’
Supply
Homes
12
Canadian Housing Valuation: home prices vs. fair value
& deviations from fair value (%)
Months
11
350000
130
120
10
110
100
9
250000
90
80
8
CDN $
70
7
6
60
150000
50
40
30
50000
5
20
10
4
0
-10
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-50000
1980
U.S. Total Existing Homes
-20
1985
1990
deviations from fair value
1995
home prices
2000
2005
fair value
• An unprecedented run-up in prices has led to an unprecedented supply of homes.
Source: Datastream
• The GoC just introduced measures to restrict the supply of credit to the housing sector.
• Our valuation model for Canada suggests an extended period of flat prices, like the early 1990’s.
• Weak housing impacts consumers’ spending attitudes.
CIBC Global Asset Management Inc.
Source: Datastream and CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 12
2010
Economy - Debt
Canadian Household Credit as % of GDP
U.S. Household Credit as % of GDP
US Household Credit as % of GDP
C anadian Hous ehold Credit as % of GD P
90
90
80
80
70
70
60
60
50
50
40
40
30
30
1970
1975
1980
1985
1990
1995
2000
2005
2010
55
60
65
70
75
Canadi an Househol d Credi t as % of GDP
T rend
80
85
90
95
00
10
05
15
USHousehold Credit as % of GDP
Trend
Sour ce: D atastr eam & CIBC Gl obal Asse
• Households have become over extended with record amounts of debt
Source: Datastream & CIBC Global Asset Management Inc. Calculations
• Debt has to be paid back … or written-off.
• Loan demand will remain soft as attitudes toward debt become more conservative.
CIBC Global Asset Management Inc.
Source: Datastream and CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 13
20
Economy - Savings
• The consumer can’t do the heavy
lifting in this recovery.
& Canada
Savings
Rate
U.S. U.S.
& Canada
Savings
Rate
20%
• Lowered return expectations should
lead to higher savings.
16%
• An aging population is increasing
savings to meet their retirement
needs.
12%
• Demand for safe income is rising.
• Bonds should benefit.
8%
4%
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
U.S. Savings Rate
Canada Savings Rate
Source: Datastream
CIBC Global Asset Management Inc.
Source: Datastream and CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 14
Inflation – Wages
• Wage costs are the best predictor of
future inflation.
Cost
LaborCost
UnitLabor
U.S.
Hourly Earnings
AverageHourly
Canada
Canada
Average
Earningsvsvs.
Unit
• U.S. Unit labour costs – the
combination of productivity, output
and wages – will remain low.
5%
4%
3%
• The excess slack in labour markets
and in industrial capacity should
persist.
2%
1%
0%
-1%
-2%
-3%
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Canada Average Hourly Earnings - Industrial Aggregate YoY
US Unit Labor Cost YoY
Source: Datastream & CIBC Global Asset M anag ement Inc. Calculations
Source: Datastream and CIBC Global Asset Management Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 15
Interest Rates – Trend
The Secular Rally is Intact
Government of Canada – 30-year Yield
• Interest rates remain in their downward channel.
• There is a strong correlation between short-term and long-term interest rates.
• The Federal Reserve and the Bank of Canada will keep administered rates low for an extended period.
• CIBC GAM forecasts a range of 3.25% to 4.25% for long-term yields.
Source: PC Bond, a business unit of TSX Inc. and CIBC Global Asset Management Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 16
Outlook
 Forecast Yield Range
•
The Bank of Canada will resume raising short-term rates later this year. CGAM
expects another 0.50% increase under the base case scenario (Sluggish Recovery).
•
We expect no action from the U.S. Federal Reserve this year.
•
Longer-term bonds should remain in a trading range given the headwinds of fiscal
policy, continued deleveraging, and Basel III’s impact.
1 YEAR FORECAST
Dec 31 2010
Probability->
Economic
Expansion
25%
Sluggish
Recovery
50%
Deflation
25%
Bank Rate
1.00
2.25
1.50
0.50
2 Year
1.67
3.65
2.40
1.00
10 Year
3.20
4.40
3.50
2.00
Corporate Yield
Corporate Spread
3.81
1.41
4.50
0.66
3.75
0.95
3.25
2.00
RRB Yield
1.10
2.20
1.85
2.60
Source: CIBC Global Asset Management Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 17
Strategy
 Current
• Duration neutral vs. index.
• Overweight mid-term bonds, given expectations that the curve will remain
steep.
• Portfolio yield still higher than benchmark (+75 bps at year-end 2010).
• Selectively adding corporate positions – both investment grade and high yield.
Source: CIBC Global Asset Management Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 18
Strategy
 Risks to Outlook
• Credit spreads widen – risk of European sovereign issues
• Yields rise markedly – due to higher than forecasted inflation
• Yield curve flattens – greater tightening than anticipated
Source: CIBC Global Asset Management Inc.
CIBC Global Asset Management Inc.
CONFIDENTIAL
| Page 19