Canadian Bonds

The Canadian bond portfolio returned 1.4% compared to 2.0% for the benchmark DEX Universe Bond Index for Canada over the last year. Almost three-quarters of the underperformance came in the final three months of the year as the bond market rallied due to concerns that the U.S. sub-prime housing situation would cause a severe economic slowdown or recession. The bond portfolio underperformed since it did not hold as many longer-dated Canadian bonds as the benchmark index. Going forward, the U.S. housing and its related sub-prime lending problems will dominate the global landscape. Bond yields will continue to move lower until the U.S. housing market stabilizes. The depth and breadth as yields move lower will depend on whether the U.S. experiences an outright recession or just a mid-cycle slowdown. Most economists expect the U.S. to avoid a full-fledged recession.