BMO Strategic Fixed Income Yield Fund – Biweekly Update
February 21, 2025
Portfolio Manager Commentary
The BMO Strategic Fixed Income Yield Field (SFIYF) contains a diversified suite of interest rate structured products with exposure to US rates. The fund’s largest exposures are to front end US interest rates with 22% in 1y and under rates, 28% in 3-5y rates, 13% in 10y rates as well as 27% in curve steepeners. Contingent coupons for range accruals are on average between 7-9% and steepener coupons remain between 10-11%. Range accruals remain within their ranges with an average of 70bps from the tops of the range.
The delay of Canada and Mexico tariffs gave North American markets a bit of breathing room. Recently on the tariffs front, US is proposing an additional 10% tariff on China commencing Feb 4 and 25% tariff on all steel and aluminum imports into the US starting Mar 12. These announcements are both inflationary and increase business uncertainty in US and globally. Despite all the noise, we look to economic data to gauge how all this uncertainty is filtering through to the economy. Since last writing, Canadian and US unemployment data was released on Feb 7, both showing a strengthening in labour markets compared to prior months. For US, this trend is a continuation of the balanced labour market that we’ve seen in the last few months. Adding to the rates markets sell off, US CPI printed higher on Jan 12 (0.4% on core MoM vs 0.2% the month prior). This started a 12bps sell off across the curve only to be reversed the following day by PPI data. Although headline PPI came in higher than expected, the PCE components within PPI came in weaker than expected suggesting that PCE (the Fed's preferred inflation measure) could come in more moderate than expected.
Overall the amount of uncertainty not just in US markets but across the globe continues to stoke volatility. The PMs of the fund do not want to speculate on what Trump is going to do. Instead, we make decisions based on incoming data. Since our structured funds use structured products to monetize volatility, generally higher volatility results in higher coupons for these products. Given the increased uncertainty, the PMs of the fund can use higher volatility to find attractive coupons for range accruals with a larger buffer than our usual 100bps. In recent weeks we have increased our allocation to 10y range accruals by 6%, getting the same coupon levels of 7-7.5% while achieving an upside buffer of 110-130bps above prevailing market rates. The chance of inflationary forces possibly reigniting is now higher given protectionist Trump administration policies. Market continues to teeter between one or two cuts out of the fed this year. With a continually resilient US economy, the Fed not in a rush, and Trump’s policies sparking debates with economists and market participants alike, all scenarios are now on the table. As a result, the PMs have started diversifying some of the fund’s curve exposure away from front end, given the attractive risk reward further out the curve. There is still a large amount of uncertainty in the actions of the US government given the Trump administration and the fund continues to monetize this volatility through the strategy of prudent range accruals and steepeners, using the increased volatility to add extra buffer room to coupon contingency.
Fund Snapshot
| Contingent Coupon | Credit Rating |
|---|---|
| 6.1% | A |
Distributions
| Previous | Upcoming |
|---|---|
| February 18, 2025 | March 17, 2025 |
Fund Characteristics
| Series | Fund Codes | MER (%)* |
|---|---|---|
| Advisor (CAD) | BMO99341 | 1.07 |
| F (CAD) | BMO95341 | 0.51 |
| **Low to Medium risk rating by prospectus. |
30 Day Historical Volatility
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