As the equity markets stumbled in May, the Canadian bond universe had its best month of 2011 returning 154 basis points (bps) and pushing the year to date (YTD) return further into positive territory for the year at over 2%.

For the month, the solid return was driven by the long end of the curve while the short end underperformed. Overall, government bonds slightly outperformed corporate bonds however, on a year to date basis Corporates have returned nearly a full percentage point better than governments.

Here are the numbers:

				May.31	YTD
Universe:			1.5%	2.1%
Universe (Gov’t):		1.6%	1.9%
Universe (Corp):		1.4%	2.8%				

Short Term:			0.7%	1.6%
Short Term (Gov’t):		0.7%	1.4%
Short Term (Corp):		0.8%	2.0%				

Mid Term:			1.6%	2.6%
Mid Term (Gov’t):		1.6%	2.2%
Mid Term (Corp):		1.5%	3.4%				

Long Term:			3.1%	2.7%
Long Term (Gov’t):		3.2%	2.4%
Long Term (Corp):		2.9%	3.8%

Yields were down month over month across the curve ranging from -2 bps for the 1 month T-Bill to -25 bps on the 5 year bond.

Current Yields:		May.31
1 Month:		0.9%
1 Year:			1.2%
5 Year:			2.3%
10 Year:		3.1%
Long Bond:		3.5%

The Prime Rate in Canada remains at 3% (3.25% in US). As expected, on May 31st the Bank of Canada maintained its overnight rate at 1% and the Bank reiterated that the rate rises will be “carefully considered” taking into consideration the increased risks from peripheral Europe, continued high commodity prices, the economy’s material excess supply and a stronger Canadian dollar.

Expectations for rate increases have now moved from summer to later in the year. The next scheduled meeting is July 19th.