Fixed Income Strategy Report (Q2 2025)

Fixed Income Portfolio for Q2 2025

• Given the backdrop, the priority for our fixed income portfolio is to focus on strong credit and to optimize yield at a shorter duration.¹
• In the U.S., data that tracks the real economy appears to be slowing, but we don’t get the sense that the Federal Reserve is in any hurry to ease policy rates. That’s largely due to the potential from ​‘stickier’ consumer prices as tariffs start to make their presence felt.
  
• As such, any surprise from stronger-than-expected economic data could make its presence felt further out the curve.² That accentuates the greater ​“two-way” risk to duration that we see at this point. For now, we have stronger conviction on real yields³ in the U.S., which look elevated at this point and we have allocated a portion of our portfolio to ZTIP.
• Additionally, our preference is to maintain some liquidity given the uncertain nature of tariffs and the passthrough effect on markets. Given this, we are allocating some weight to ZUCM.
• In Canada, some of the outperformance of the sovereign curve has been given back over the past month. While tariffs represent important risks over the medium-term, we get the sense that the market is reticent to reprice the Bank of Canada on the expectation that fiscal stimulus is likely to be forthcoming in the coming quarters.
• In the near-term, it does appear that the CAD curve feels a bit rich. We’ll likely need material weakness in real economic data before it makes sense to add to long positions in the CAD curve. But for now, we’re happy to roll with our current positions in ZDB (albeit at a lower weight relative to Q1), ZPR and ZBI.

BMO Global Asset Management. For illustrative purposes only. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. These are not recommendations to buy or sell any particular security. Particular investments and/​or trading strategies should be evaluated relative to the individual’s risk profile and investment objectives. Professional advice should be obtained with respect to any circumstance. 

* Weighted average yield to maturity: The market value-weighted average yield to maturity includes coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity. 

Source: Bloomberg, BMO Asset Management Inc., as of March 31, 2025.

Fund Performance (%)

Bloomberg, as of March 31, 2025. Inception date for ZDB = February 10, 2014, ZPR = November 14, 2012, ZBI = February 7, 2022, ZTIP = January 20, 2021, ZUCM = September 27, 2023. 

Credit Summary

Term Summary

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¹ Duration: A measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as number of years. The price of a bond with a longer duration would be expected to rise (fall) more than the price of a bond with lower duration when interest rates fall (rise).

² Yield Curve: A line that plots the interest rates of bonds having equal credit quality but differing maturity dates. A normal or steep yield curve indicates that long-term interest rates are higher than short-term interest rates. A flat yield curve indicates that short-term rates are in line with long-term rates, whereas an inverted yield curve indicates that short-term rates are higher than long-term rates.

³ Real Yield: the nominal yield (the stated interest rate) of a bond or other debt instrument, adjusted for inflation.