BMO Strategic Fixed Income Yield Fund – Biweekly Update
January 24, 2025
Portfolio Manager Commentary
The 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 26% in 1y and under rates, 32% in 3-5y rates, 5% in 10y rates as well as 30% in curve steepeners. Contingent coupons for range accruals are on average between 7-9% and steepener coupons remain between 10-12%. Range accruals remain within their ranges with an average of 66bps from the tops of the range.
Fixed income markets have had a volatile start to the year. The non-farm payrolls and unemployment prints out of US and Canada on Friday Jan 10 brought another wave of sell offs in US and Canadian bond markets. The biggest surprise was unemployment coming in lower than expected, with US unemployment printing at 4.1% vs 4.2% from the month prior. In US, this adds to the recent narrative of a resilient labor market. Interest rate cut expectations in the US were pulled back, with the first cut moving to October 2025. In addition to this move, US bond markets sold off 10-15 bps on the day. This sell off was reversed the following week when US inflation data was released. On Jan 15, CPI data showed month over month inflation deceleration in the US, with core CPI printing at 0.2% vs 0.3% expected. Bond markets then reversed the prior Friday sell off and more, rallying 15-20bps on the back of this headline. As the Fed remains data dependent, market volatility on the back of data surprises is expected to continue, particularly around inflation and employment data given the Fed’s dual mandate of maximum employment and stable prices.
The NAV of SFIYF has followed bond market direction, but overall between these two large market moving events the NAV remains unchanged to slightly higher (adjusting for distributions). Despite the recent volatility, the fund continues paying out coupons of over 6% with the recent Jan distribution of 6.2cents. Looking ahead, we look towards Trump’s official return to office. Markets have priced in a substantial amount of fears and uncertainty around tariffs. We believe that the risk is now to the upside, and that the amount of negative sentiment priced into rates likely exceeds what will actually materialize. We will keep a close watch on the actions of the US government given Trump’s inauguration this week and adjust the strategy if needed but the market environment continues to support the funds strategy of investing in prudent front end range accruals and steepeners.
Fund Snapshot
| Contingent Coupon | Credit Rating |
|---|---|
| 6.3% | A |
Distributions
| Previous | Upcoming |
|---|---|
| January 16, 2025 | February 17, 2025 |
Fund Characteristics
| Series | Fund Codes | MER (%)* |
|---|---|---|
| Advisor (CAD) | BMO99341 | 1.30 |
| F (CAD) | BMO95341 | 0.73 |
| **Low to Medium risk rating by prospectus. |
Source: Bloomberg. January 20, 2025.
Source: Bloomberg January 20, 2025.
30 Day Historical Volatility
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