Market Commentary
The fourth quarter (Q4) of 2024 was characterized by further aggressive rate cuts from both the Federal Reserve (Fed) and the Bank of Canada (BOC). In response to a notable uptick in the September unemployment rate, the BOC lowered its policy rate by 50 basis points (bps) on October 23 and again on December 11, reducing it from 4.25% to 3.25%. Market participants now anticipate an additional 50 bps of cuts over the course of 2025.
Following a 50 bps cut to the Fed funds rate range on September 18, the Fed reduced it by 25 bps on both November 7 and December 18, bringing the range to 4.25%–4.50%. These actions, taking place so close to the Election, were highly unusual from a historical standpoint.
Shortly after the initial September 18 rate cut, longer-dated Treasury yields began to rise, with the 10-year Treasury yield surging by more than 10bps—one of the most rapid increases in recent memory. Bond investors appeared to lose confidence in the Fed’s commitment to controlling inflation, interpreting the policy stance as overtly supportive of growth. Strengthening economic data and robust stock market performance also led short-term markets to scale back expectations for future rate cuts. The Atlanta Fed estimates that U.S. GDP grew by 3.0% in Q4, a rate exceeding trend and potential, thus contributing to inflationary pressures. At the December Federal Open Market Committee (FOMC) meeting, officials raised their growth and inflation forecasts and adjusted their estimates of the ‘neutral rate.’ Currently, only a 25 bps rate cut is anticipated in 2025, down sharply from the 150 bps projected immediately following the September decision.
Earlier moderation in inflation has started to reverse. Components that previously helped temper inflation are now rising again, aligning with persistent service sector pressures. Both headline and core measures have been trending higher since September.
The return of a Trump administration implies the possibility of large government deficits stemming from proposed tax cuts and tariffs, which are expected to stimulate growth and demand—both inherently inflationary. In combination with deregulation and onshoring initiatives, these policies have helped broaden stock market gains, pushing major indices to repeated all-time highs.
Fund Positioning
The Tactical Sovereign Bond Fund outperformed its benchmark in Q4, returning 3.1% compared to the benchmark’s –0.4%. As of quarter-end, the Fund’s Effective Duration was less than 0.1 years.
Two primary factors drove outperformance. First, maintaining a ‘higher for longer’ stance along the yield curve helped preserve capital, while the benchmark’s longer duration incurred losses as yields climbed. Second, the Fund held an approximate 53% long U.S. dollar position (versus the Canadian dollar); based on the underperformance of the Canadian economy relative to the United States and the scaling back of overly optimistic Fed rate-cut projections. The subsequent ‘bear steepening’ of the U.S. Treasury curve widened the interest rate spread between the two currencies, favouring a stronger U.S. dollar.
Presently, this strategy is expected to remain in place largely through 2025, subject to developments in macroeconomic indicators, geopolitical events, policy shifts under the new Trump administration, or financial market disruptions. As U.S. Treasury yields continue to rise to potentially attractive levels, the Fund may selectively extend duration.
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 December 31, 2024.
| Company | 1 Year | 3 Year | Since Reorganization3 (August 27, 2018) |
5 Year | Since Inception (July 25, 2016) |
|---|---|---|---|---|---|
| Caldwell Tactical Sovereign Bond Fund Series F | 5.1% | 2.2% | 1.5% | 1.8% | 0.8% |
| S&P Canadian Sovereign Bond Total Return Index | 3.3% | -0.4% | 1.3% | 0.5% | 0.7% |
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: January 27, 2025.