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Fixed Income Commentary: As at June 30, 2021

Source: Phil Mesman, CFA | Sam Acton, CFA
Publish Date: Jul 15, 2021
Read Time: 4 minutes
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In Q2, the Picton Mahoney Fortified Income Fund (Class F) returned 0.92% and the Picton Mahoney Fortified Income Alternative Fund (Class F) returned 0.99% underperforming the blended benchmark composed of 75% ICE BofAML Global High Yield Index / 25% ICE BofAML Global Corporate Index (TR) (Hedged to CAD). While outperforming year-to-date, our relatively defensive positioning in both credit and duration contributed to the underperformance in the quarter.

The second quarter enjoyed continued strong performance across most assets as the vaccine roll-out progressed and developed economies moved closer toward re-opening. Despite some renewed uncertainty around COVID variants, the overall trend for risk-assets remained higher as fund flows and technicals remain broadly supportive.

The government bond market experienced a strong rally representing a major reversal from Q1 when yields rose significantly. After reaching a high of 1.77% on March 30th, the yield on the U.S. 10 Year Treasury Note fell to 1.47% on June 30th1. U.S Federal Reserve officials seem to struck a more hawkish tone at the June Federal Open Market Committee meeting, with several committee members shifting their forecast for rate hikes into 2022 and 2023 and the timeline for tapering of asset purchases moved forward as well. We believe this is what led to a flattening of the yield curve as the market priced in a more responsive Fed.
Credit rallied with spreads tightening to post-crisis tights in both the investment grade and high yield markets. With the economic recovery fully priced in, and as we move past the peak in accommodative monetary policy, we are becoming more cautious on credit valuations here from a margin of safety perspective.

However we continue to be very active with new idea generation and have added several new special situation investments during the quarter. We see a trend of issuers focusing on improving their balance sheets via mergers and acquisitions, asset sales, and early refinancings and these are all potential sources of event-driven investments for our portfolio. Given the stretched valuations in fixed income we believe it is a great opportunity to layer in hedges in both credit and rates to reduce potential volatility as we progress through 2021.

Picton Mahoney Fixed Income Fund (Cl. F) and Picton Mahoney Fixed Income Alternative Fund (Cl. F) performance chart
This material has been published by Picton Mahoney Asset Management (“PMAM”) on July 15, 2021. It is provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by PMAM, nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and may lose value.

This material may contain “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs of PMAM as of the date they are made. PMAM assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements, as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.

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