Market Commentary
The first quarter of 2025 (Q1) was marked by two quarter-point reductions in the Bank of Canada’s policy rate, lowering it from 3.25% at the end of 2024 to 2.75%, with cuts announced on January 29 and March 12.
The Bank’s decisions were driven by an elevated unemployment rate of 6.6% or higher and a general easing of inflationary pressures, though the GST holiday introduced considerable volatility into the data. While uncertainties surrounding U.S. tariff policy were acknowledged, central banks typically respond to the economic impact of such policies rather than act pre-emptively.
In contrast, the Federal Reserve (Fed) held the Fed funds rate steady throughout Q1. The sharp rise in long-term market interest rates, following the Fed’s cumulative 100 basis points of cuts since September 2024, likely discouraged further easing. Fed officials also signaled a preference to wait for tangible signs of economic weakness—particularly a rise in unemployment—before adjusting policy further, emphasizing that tariffs would likely result in a one-time price adjustment rather than a lasting inflation surge.
However, the Administration’s tariff measures proved far more aggressive than anticipated, introducing significant uncertainty. As a result, U.S. equities, Treasuries, and the U.S. dollar all declined simultaneously, reflecting a growing reassessment of “U.S. Exceptionalism” by global investors.
The widespread and rapid selling across equities, bonds, and commodities bore the hallmarks of forced liquidation, likely triggered by prime brokers as leveraged funds faced large margin calls. One likely contributor was the risk parity sector, where portfolios designed to balance risk across negatively correlated assets (e.g., stocks and bonds) faced dual declines, forcing sales across asset classes to meet collateral requirements.
Looking ahead, tariffs are expected to impose a “supply shock” on the U.S. economy—driving prices higher and creating potential shortages—while delivering a “demand shock” to Canada, where weaker exports could pressure domestic businesses and employment.
Although the Bank of Canada left its policy rate unchanged at its most recent meeting, it is widely believed that a further rate cut would have been prudent if not for the imminent federal election. A pre-emptive cut could have supported economic growth, weakened the Canadian dollar, and bolstered the competitiveness of Canadian exports. The Bank of Canada is expected to resume easing post-election.
Fund Positioning
The Tactical Sovereign Bond Fund outperformed its benchmark in Q1 2025, delivering a return of 2.3% compared to the benchmark’s 1.9%. As of quarter-end, the Fund’s Effective Duration stood at 6.5 years.
Outperformance was primarily driven by tactical trading within the bond market. The Fund’s long U.S. dollar position relative to the Canadian dollar had little impact on quarterly performance, as exchange rates remained largely unchanged from year-end 2024. In response to shifting market sentiment, the Fund trimmed its U.S. dollar exposure from 74% at the end of Q4 2024 to approximately 40% by the end of Q1.
While capital preservation remains a key tenet of the Fund’s strategy, the Fund benefits from its ability to capitalize on evolving market dynamics within bond and currency markets.
1Series F, total return CAD terms
2Duration is a measure of the sensitivity of the price of a bond to a change in interest rates. A fixed income security (or fund) with a higher (longer) duration would indicate a higher sensitivity to interest rates and thus, higher interest rate risk.
Standard performance as at March 31, 2025.
| Company | 1 Year | 3 Year | Since Reorganization3 (August 27, 2018) |
5 Year | Since Inception (July 25, 2016) |
|---|---|---|---|---|---|
| Caldwell Tactical Sovereign Bond Fund Series F | 7.3% | 3.9% | 1.8% | 0.7% | 1.0% |
| S&P Canadian Sovereign Bond Total Return Index | 6.6% | 2.1% | 1.5% | -0.1% | 0.9% |
3The Fund, following a security holder vote, changed its fundamental investment objective August 27, 2018 and also reclassified former Series I units to the current Series F. For more information refer to the Simplified Prospectus of the Fund.
The information contained herein provides general information about the Fund at a point in time. Investors are strongly encouraged to consult with a financial advisor and review the Simplified Prospectus and Fund Facts documents carefully prior to making investment decisions about the Fund. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Rates of returns, unless otherwise indicated, are the historical annual compounded returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed; their values change frequently and past performance may not be repeated.
Publication date: April 30, 2025.