Skip to Main Content

BMO Strategic Fixed Income Yield Fund – Biweekly Update

December 6, 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 has slightly increased its allocation mix for range accurals to front end rates, with the current allocation being 26% in 1y and under rates, 32% in 3-5y rates, 5% in 10y rates and 30% in curve steepeners. Contingent coupons for range accruals are on average between 6.5-8.5% and steepener coupons remain between 8-10%. Range accurals remain within their ranges with an average of around 75bps from the tops of the range.

The rates sell off from the last two months is starting to plateau, kicked off by Trump’s selection of secretary treasury last week. Trump’s nomination of Bessent is seen as a more moderated choice, providing markets comfort that some of the more extreme tariff scenarios can be eliminated. Bessent’s plan is to focus on growth through deregulation, use tariffs as a negotiation tactic which could mean reduced or less time tariffs are enacted, and increase oil production. Rates markets rallied and bear flattened up to 10bps across the board on the news with markets adding rate cuts back into the US curve in April meeting and beyond. Data over the last few weeks was light due to US thanksgiving week but right before the US holiday we did have PCE coming in slightly stronger lead by core services. US rates markets generally looked past this, with rates rallying 4bps over the thanksgiving week. In other news, USDCAD briefly topped 1.415 as Trump’s threaten 25% tariffs to Canada and Mexico if key issues such as illegal migrants and drug smuggling are not addressed. Tariffs could further stifle growth in an already softening Canadian economy, which could cause further US and Canadian rates divergence. Terminal rates in the US are about 100bps higher than Canada’s with Canada expecting to cut at least 25bps in the upcoming December Bank of Canada meeting, while the US market is only pricing in 50% of a 25bps cut. Higher USDCAD does result in an increase to the fund’s cost of hedging, but coupons on interest rate structured products are more attractive in the US where rates remain elevated compared to Canada.

In the latter half of November, we have added positions to 1y and under range accrual. One benefit of the increased front end volatility and central bank uncertainty is that SOFR or overnight rate range accrual pricing has become attractive, ranging from 6-7%. We added a 2mm or 5% of the fund allocation to a SOFR based range accrual, which will benefit more directly from fed cuts. We still believe front end vs long end steepeners will perform as the fed steadily brings rates back under restrictive territory and we will continue pursuing the strategy of prudent range accruals (range accurals 100+ bps in the money), avoiding the 10y and beyond part of the curve for now.

Fund Snapshot

Distributions

Fund Characteristics

Implied Volatility Move Index

Implied Volatility Move Index

US Government Yield Curve

US Government Yield Curve

30 Day Historical Volatility

Disclaimer

Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.

For a summary of the risks of an investment in BMO Mutual Funds, please see the specific risks set out in the simplified prospectus.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

This material is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

The viewpoints expressed by the Portfolio Managers represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

**All investments involve risk. The value of a Mutual Fund can go down as well as up and you could lose money. The risk of a Mutual Fund is rated based on the volatility of the Mutual Fund’s returns using the standardized risk classification methodology mandated by the Canadian Securities Administrators. Historical volatility doesn’t tell you how volatile a Mutual Fund will be in the future. A Mutual Fund with a risk rating of “low” can still lose money. For more information about the risk rating and specific risks that can affect a Mutual Fund’s returns, see the BMO Mutual Fund’s simplified prospectus.

*As the fund is less than one year old, the actual Management Expense Ratio (MER) will not be known until the fund financial statements for the current fiscal year are published. The estimated MER is an estimate only of expected fund costs until the completion of a full fiscal year, and is not guaranteed.

“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.

LinkedIn
Follow BMO

“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).

BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.

Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by current net asset value (NAV). Distributions are not guaranteed, may fluctuate and are subject to change and/or elimination. Distribution rates may change without notice (up or down) depending on market conditions and net asset value (NAV) fluctuations. The payment of distributions should not be confused with a BMO Mutual Fund’s performance, rate of return or yield. If distributions paid by a BMO Mutual Fund are greater than the performance of the investment fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a BMO Mutual Fund, and income and dividends earned by a BMO Mutual Fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero.

Distributions, if any, for all series of securities of a BMO Mutual Fund (other than ETF Series) are automatically reinvested in additional securities of the same series of the applicable BMO Mutual Fund, unless the securityholder elects in writing that they prefer to receive cash distributions. For further information, see the distribution policy for the applicable BMO Mutual Fund in the simplified prospectus.

Legal and regulatory disclosures

This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.