BMO Strategic Fixed Income Yield Fund – Biweekly Update
October 11, 2024
Duy Le
CFA, Portfolio Manager, BMO Global Asset Management
Portfolio Manager Commentary
The BMO Strategic Fixed Income Yield Field (SFIYF) contains a diversified suite of interest rate structured products with exposure to the US rates curve. The fund continues to maintain the previous month’s asset allocation with the largest exposures continuing to be in 2s30s steepeners (23.7%), 3y rates (20.2%) and 5y rates (20.2%). Thus, about a quarter of the fund is in steepeners vs range accruals. Recent contingent coupons for range accruals are on average between 6.6-8% and steepeners between 8-10%.
There have been several developments whipsawing interest rate markets in different directions. At the start of the month on October 2, risk off tone on back of tensions rising in the middle east caused on average a 6bps rally in US Treasuries across the curve. The risk off move also caused a 2.5pt spike in the VIX, and the S&P index sold off 0.93% on that day. This was quickly forgotten as strong economic data came out of the US in the following days, shifting the direction of rates the other way. Most recently in terms of strong US data, non-farm payrolls beat expectations by over 100k, and unemployment data came in 0.1% lower than expectations on October 4, causing a 13bp rates sell off on average across the curve as well bear flattening. Interest rate markets priced out all chances of a 50bps cut for the November 6 Federal Open Market Committee (FOMC) meeting on the back of this data.
We do expect NAV fluctuations on the recent higher rates, curve flattening, and higher interest rate volatility. The recent higher rates do not support range accrual performance and bear flattening impacts the steepener positions in the fund. Despite the large moves in rates, all the range accruals are still well within the accrual ranges and our view of the future path of interest rates has not changed. The strong economic data and the recent rates pull back adds to the soft- landing narrative in the US. Strong economic data may alter the pace of Fed rate cuts but interest rates in US are still far from the neutral rate. The soft-landing scenario brings with it yield curve normalization and in the long run continues to support steepeners. Resilient economic data out of the US could indicate higher rates for longer, allowing for a wider scope of entry points for range accruals. This pull back in rates is a good opportunity to add to the fund’s existing asset mix at more favorable levels. Any inflows into the fund post this rates sell off will reset the contingent coupon higher, which is positive given our rate view has not changed.
Fund Snapshot
| Contingent Coupon | Credit Rating |
|---|---|
| 6.77% | A |
Distributions
| Previous | Upcoming |
|---|---|
| September 16, 2024 | October 16, 2024 |
Fund Characteristics
| Series | Fund Codes | MER (%)* |
|---|---|---|
| Advisor (CAD) | BMO99341 | 1.30 |
| F (CAD) | BMO95341 | 0.73 |
| **Low to Medium risk rating by prospectus. |
Implied Volatility Move Index
Source: Bloomberg. Data illustrated for the period from September 24, 2023, to September 24, 2024.
US Government Yield Curve
Source: BMO GAM October 7, 2024.
SFIYF & Benchmark 30 Day Volatility
Source: BMO GAM October 7, 2024.
1Source: BMO GAM
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