BMO Strategic Fixed Income Yield Fund – Biweekly Update
November 22, 2024
Duy Le
CFA, Portfolio Manager, BMO Global Asset Management
Portfolio Manager Commentary
The BMO Strategic Fixed Income Yield Fund (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 a higher allocation to steepeners. The largest exposures are in 2s30s steepeners (28.6%), 5y rates (20.4%), 3y rates (16.4%). 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 around 60bps from the tops of the range.
There were some major economic events over the last few weeks. Trump won the US election, winning the popular vote as well. The Republicans have won the house and the senate, securing the red sweep scenario. This gives the Republican party the opportunity to pass more policies and legislation. On election day, interest rates moved on average 15bps higher with rates overall maintaining 16bps higher from Nov 4 onward on inflationary concerns related to Trump’s policies. During the latest Federal Open Market Committee, Fed cut 25bps as predicted and Jerome Powell communicated that the Fed will keep moving forward with the current plan of steady path towards neutral and be reactionary to government policies as they come. The Fed articulated that central banks are not in business to speculate on possible future fiscal policy results and will react to any results of fiscal policy when the time comes. The base case is still that inflation is expected to steadily decline the Fed remaining data dependent. Trumps inauguration is on January 20th and it will take some time thereafter for the new government to establish a new team and put through policy changes. We expect this to come into play in the 2nd half of 2025 at the earliest. There is still 52bps of cuts priced into the first half of next year and although terminal rates in the US are higher (3.75 vs 3.5 pre-election), this is still ~75bps lower than where we are now1. Like Powell, economists still believe that US monetary policy is currently restrictive and although the path maybe bumpy, there is room to go lower.
This shift in rates market environment presents opportunities for rates funds. The days of low volatility rates markets driven by heavy fed intervention and quantitative easing post 2008 are behind us now, and markets are in a rate regime that the 21st century is unfamiliar with. We will continue to monitor the state of the global economies and the various rates markets, remaining vigilant and ready for tactical opportunities or full regime shifts. Although we do not currently see the need, we are prepared to add different trade structures or other geographies should US rates shift out of restrictive territories. We still believe front end vs long end steepeners trades will perform in this rate environment 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 and remaining vigilant of extended regime shifts.
Fund Snapshot
| Contingent Coupon | Credit Rating |
|---|---|
| 6.87% | A |
Distributions
| Previous | Upcoming |
|---|---|
| November 18, 2024 | December 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
US Government Yield Curve
30 Day Historical Volatility
1Source: Bloomberg.
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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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