WEBVTT

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<v 0>At the end of the first quarter,</v>

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we observed increasing bond market confidence that rate cuts were on the way to

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deal with the fallout of the regional banking crisis.

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The second quarter showed us once again that the bond market is not a reliable

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predictor.

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The central banks in Canada and the U.S. both raised administered rates,

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and 2-year yields surged.

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We have plotted the yield of the 2-year Government of Canada Bond relative to

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the overnight rate.

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While the bond market continues to recalibrate its expectations and short-term

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maturities,

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longer-term government bond yields in Canada have been much more steadfast.

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We have added the 30-year yield to the graph to illustrate this.

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Longer-term bonds have rebuked the surge in the short end this year. In Canada,

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the 30-year yield modestly rose in the past quarter and now sits right where it

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started the year.

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The growing inversion in the yield curve has led to outperformance of

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longer-term issues this year. With short rates rising and long rates steady,

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the yield curve has moved to its most inverted position since 1990.

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One consequence of this inversion is that 3-month T-Bills are now yielding more

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than long-term A-rated corporate bonds.

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Surely investors should receive compensation above the risk-free rate when

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taking on not-risk-free credit exposure. For some,

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the fear of missing out or risk of losing out on falling yields is just too

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much.