Northern Trust Pension Universe Data: Rising Bond Yields Impact Canadian Pension Plan Returns During First Quarter 2021

Rhea-AI Summary

The Northern Trust Canada Universe reported flat performance for Canadian pension plans in Q1, with a median return of -0.2%, impacted negatively by rising bond yields. Strong equity returns were offset by falling bond prices, as the Canadian yield curve steepened amid increasing optimism from vaccination progress and favorable economic data. Canadian equities, measured by the S&P/TSX Composite Index, gained 8.1%, led by Health Care and Energy sectors. Conversely, the Canadian fixed income market declined by 5.0%. The Bank of Canada maintained its policy rate at 0.25% and reaffirmed a commitment to keep rates low until 2023.

Positive

• Canadian equities posted an 8.1% return in Q1, led by strong performances in Health Care and Energy sectors.
• Investor sentiment improved due to vaccination progress and favorable economic data.
• The Canadian economy showed signs of recovery with significant job creation.
• The Bank of Canada maintained a supportive monetary policy.

Negative

• Median pension plan return closed at -0.2%, dampened by poor bond performance.
• Canadian fixed income market declined by 5.0%, with long-term bonds underperforming.
• Bond returns entered negative territory as yields increased.

Canadian Pension Plans were negatively impacted by rising bond yields in the first quarter, according to the Northern Trust Canada Universe. Plans in the universe saw flat performance overall, with strong equity returns countered by falling bond prices, which push up yields.

Positive sentiment boosted equity markets as the global Covid-19 pandemic started to wane amid new vaccine approvals and progress on vaccination programs. As vaccination numbers continued to rise, coupled with favorable economic data and healthy corporate earnings, investor sentiment turned more optimistic. The Canadian yield curve steepened throughout the quarter, as bond prices fell on the prospects for future growth and potential for a rise in inflation.

“Pension plan investments were dampened by weaker bond returns and the Canadian median pension plan closed the first quarter with a return of -0.2%,” said Katie Pries, President and CEO of Northern Trust Canada. “Vaccination progress has given plan sponsors a more optimistic view of the future path to recovery. This positive outlook, however, triggered bond returns to enter negative territory, diminishing the impact of equity investment gains. Emerging from the pandemic requires time and resilience, and this quarter has provided renewed visibility for many, as we continue on a journey to restore, rebuild and reshape economic and financial health.”

The Northern Trust Canada universe tracks the performance of Canadian institutional investment plans that subscribe to performance measurement services as part of Northern Trust’s asset service offerings.

Global equities finished the first quarter of 2021 on a much stronger footing compared to the steep decline witnessed during the same period a year ago. Major stock indexes continued to trend in positive territory throughout the quarter as the collective efforts of policymakers maintained support to financial markets. A continuation of accommodative monetary policy, supported by renewed fiscal stimulus as well as the roll-out of vaccinations, ignited a positive tone for economies around the world.

• Canadian equities, as measured by the S&P/TSX Composite Index, posted an impressive 8.1% for the quarter with Health Care and Energy sectors leading performance with strong double digit returns. The only sectors not generating positive results were Information Technology and Materials.

• U.S. equities, as measured by the S&P 500 Index, advanced 4.7% in CAD for the quarter. All sectors excluding Consumer Staples concluded the quarter in positive territory led by the Energy and Financial sectors.

• International developed markets, as measured by the MSCI EAFE Index, generated 2.2% in CAD for the quarter. The majority of sectors witnessed positive returns for the quarter, with Energy and Financials leading performance, while the Consumer Staples, Health Care and Utilities sectors contracted during the period.

• The Emerging Markets, as measured by the MSCI Emerging Markets Index, advanced 1.0% in CAD for the quarter, with the Materials and Real Estate sectors posting the strongest results, while Consumer Discretionary, Consumer Staples and Health Care sectors were the weakest performing segments.

The Canadian economy continued to show signs of recovery with the Bank of Canada and the Canadian government providing a foundation of support. Job losses that occurred in January were far outpaced by job creation in February and March. The Canadian Dollar firmed against major currencies during the quarter, underpinned by improving commodity and oil prices, monetary and fiscal policy support as well healthy GDP growth.

The U.S. economy witnessed healthy economic activity throughout the quarter, with continued support from monetary and fiscal stimulus. The U.S Federal Reserve (Fed) remained accommodative, leaving its policy rate unchanged at 0.00% – 0.25%. Further fiscal stimulus came in the form of the $1.9 trillion USD pandemic relief bill signed by the newly inaugurated President Biden, with the expectation of additional forthcoming fiscal stimulus targeted at infrastructure. As job creation gained further momentum throughout the quarter, the unemployment rate dropped to 6.0% at the end of March from 6.7% in December. A strong economic backdrop supported by an abundance of stimulus, led to the U.S yield curve steepening throughout the quarter.

International markets continued to witness accommodative monetary policy supported by stimulus programs. The European Central Bank (ECB) maintained its current deposit rate, and announced the acceleration of the Pandemic Emergency Purchase Programme (PEPP). The Reserve Bank of Australia maintained its cash rate at 0.10% and increased the volume of its asset purchase program. The Bank of Japan widened its trading range around its 10 year yield target and announced its asset purchases would occur on an as-needed basis.

Emerging markets posted modest results for the quarter, lagging other developed counterparts. The People’s Bank of China (PBoC) left interest rates unchanged for the quarter, while Brazil’s central bank, in a bold move, raised its benchmark interest rate by 75 basis points to 2.75%. The central bank of India announced it would maintain its accommodative stance, as the country faced another wave of the pandemic.

The Bank of Canada (BoC) kept its overnight policy rate at 0.25% and maintained its current asset purchase program, with a reaffirmed commitment to keep rates at a lower level until 2023. The BoC noted a stronger outlook, as vaccines rolled out earlier than anticipated, coupled with the ample amount of stimulus support. The yield curve steepened throughout the quarter, with a significant increase in yields for the benchmark 10 year government bonds.

The Canadian Fixed income market, as measured by the FTSE Universe Bond index, declined 5.0% for the quarter. The Provincial segment witnessed the weakest results followed by the Federal and Corporate segments. Long term bonds observed a double digit decline, underperforming both the Short and Mid-term bonds for the quarter.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 22 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of March 31, 2021, Northern Trust had assets under custody/administration of US$14.8 trillion, and assets under management of US$1.4 trillion. For more than 130 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Please visit our website or follow us on Twitter.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Please read our global and regulatory information.

View source version on businesswire.com: https://www.businesswire.com/news/home/20210427005803/en/

FAQ

What was the performance of Canadian pension plans in Q1 2021?

The median return for Canadian pension plans in Q1 2021 was -0.2%, primarily due to weaker bond returns.

How did Canadian equities perform in the first quarter of 2021?

Canadian equities, as measured by the S&P/TSX Composite Index, posted an impressive gain of 8.1% in Q1 2021.

What factors negatively impacted bond returns for Canadian pension plans?

Bond returns were negatively impacted by rising yields, leading to a decline in bond prices.

What is the current policy rate set by the Bank of Canada?

The Bank of Canada has maintained its overnight policy rate at 0.25%.

What is the outlook for the Canadian economy following the Q1 2021 performance?

The Canadian economy shows signs of recovery, with a positive outlook supported by vaccination progress and stimulus measures.