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BMO Strategic Fixed Income Yield Fund – Biweekly Update

March 21, 2025

Portfolio Manager Commentary

The BMO Strategic Fixed Income Yield Fund (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, 33% in 3-5y rates, 12% in 10y rates as well as 26% in curve steepeners. Contingent coupons for range accruals are on average between 6.5-8.5% and steepener coupons between 9-10%. Range accruals are well within their ranges given the rally in US rates markets with an average distance of 94bps from the tops of the range.

Market update

Fear and flight to quality continue to cascade through global markets as Trump’s trade war escalates. The 25% Steel and Aluminum tariffs imposed by America started a chain of escalating tariffs, with countries like Canada and EU announcing retaliation tariffs. The increased uncertainty is expected to wreck havoc amongst businesses supply chains, as many companies will choose to hold off on new capital investments until the dust settles. Smaller companies could struggle with moving their supply chains quickly, leaving some stranded without products and shut out of business. As supply chains get disrupted and companies scramble to either pivot their suppliers or consider passing on costs onto customers. Credit markets are nowhere near panic mode but the souring sentiment is starting to spread with North American credit spreads starting to see some widening. The CDX HY 5y Index**, an index tracking credit spreads of 100 HY names in North America, has widened over 50bps from near decade long lows. Unfortunately, the trade war also impacts Canada unequally, given our large trading relationship with the US and our weaker economic position prior to this trade war, so perhaps we Canadians have to be extra vigilant of downside shocks in the coming months.

Diversifying your portfolio with SFIYF

SFIYF has performed well YTD given the backdrop of greater uncertainty, waning risk appetite and widening credit spreads. The diversification away from credit that SFIYF delivers really comes to light when comparing SFIYF performance to credit. The range accrual portfolio has a long treasuries flavor that also acts as a defensive benefit in risk off markets, with chances of coupon collection increasing as rates move lower. HY Credit spreads have lifted from the lows, creating downward pressure on credit sensitive products. We have long advocated that SFIYF is a great complement to any credit portfolios and in these risk off markets, the fund continues to benefit from falling interest rates and diversification away from credit risk. Despite the souring consumer confidence, SFIYF continues to accrue and pay out 6% annualized coupons, with an even larger buffer for receiving coupons given the rally in US rates. From an asset allocation perspective, if one is concerned about future possible declines in IG or HY bonds, this is a great time to diversify a fixed income allocation into SFIYF.

** Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Source: bloomberg

Markets since the trade war “started” when Canada/Mexico tariffs were not immediately delayed on Mar 4

CDX 5y HY Credit Spreads

CDX 5y IG Credit Spreads

SEYF Coupon Comparison

Source: Bloomberg, March 18, 2025

Fund Snapshot

Distributions

Fund Characteristics

Volatility 90 Day

Source: Bloomberg, March 18, 2025.

US Government Yield Curve

Source: Bloomberg, March 18, 2025.

Reference Asset Exposure

Source: Bloomberg, March 18, 2025.

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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.

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

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**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.

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“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.

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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.

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