Ninepoint Fixed Income Strategy

December 2021 Commentary

Monthly commentary discusses recent developments across both the Diversified Bond, Alternative Credit Opportunities and Credit Income Opportunities Funds.


As expected, markets are looking through the temporary disruption stemming from the Omicron variant, instead focusing on a hawkish pivot from the Fed. With inflation persistently high and labour market conditions reflecting full employment, even the doves on the FOMC have shifted their narrative. As of the December FOMC meeting, the average funds rate expected by participants for 2022 now reflects 3 hikes (Figure 1), finally more in line with market pricing.

Since the meeting, commentary by Fed officials and more importantly by Chair Powell suggests that the first hike could come as soon as March, henceforth leaving the Fed the optionality of as many as 4 rate hikes, should inflation prove more persistent throughout the summer. At the time of writing, the bond market has now priced 4 rate hikes for 2022 (Figure 2). We do not disagree with the market’s assessment of the most likely outcome, given the pace of improvement in the labour market.

In Canada and the U.S., the rate hike cycle is poised to start in the first quarter of 2022, and should be rapid, with 4 hikes in the U.S. and as many as 5 in Canada (according to market pricing). Historically, the beginning of rate hike cycles does not result in materially adverse effects for credit or equity markets. It is later, once rates enter restrictive territory and earnings start to deteriorate, that markets get choppier. Economic growth is forecasted to be solid again in 2022 (4% and 3.8% in Canada and the US, respectively), reflecting a strong consumer and easy financial conditions. So, for the time being, markets shouldn’t be overly worried about the end of the economic cycle. But, depending on the pace of the hike cycle, its impact on the economic dynamics going into 2023, we will have to remain vigilant, particularly in the second half of 2022.

Given our view on interest rates, our portfolios are all positioned with very low duration.


While equities are still hovering near all time highs, credit was somewhat weaker in December and so far in 2022. We are faced with an interesting situation, whereas US credit has mostly recovered the Omicron induced selloff, Canadian credit spreads remain slightly elevated. The chart below shows Canadian and US credit spreads for corporate bonds of BBB rating (what we dabble the most in).

Credit spreads for both countries are typically very correlated. But sometimes they diverge, and that was particularly relevant late 2021, and the same is happening so far in 2022. The US has retraced most of the Omicron induced volatility from November, but Canada hasn’t.

Why are they diverging? We think that it is mostly due to new issue activity.

When new issues come to market, those bonds need to go somewhere. If investors have cash, no problem, but if they don’t, they need to sell something else to make room. 2021 has been a record year for new issues in Canada, far outpacing even the most optimistic forecasts and 22% more than 2020. (Chart below)

With Canada being a relatively small market, a slew of new issues can result in a supply indigestion, where spreads widen even though the overall market and fundamentals remain solid. This phenomenon has happened several times over the past year, particularly in the late spring to fall period. This is what explains the divergence in spreads between the two markets, which are usually very correlated.

These episodes are usually temporary and tend to reverse themselves as cross currency buyers emerge, normalizing credit spreads across jurisdictions.

Diversified Bond Fund (DBF)

As you all know, 2021 was a challenging year for traditional fixed income investors; yields were very volatile throughout the year and increased significantly. Still, our flagship Diversified Bond Fund managed to produce an after-fee positive return for the year of 0.26% (F-series).

While 0.26% might not seem like much, we feel given the environment, that it was a clear success compared with the Canadian broad index funds that finished the year down 2 to 3%, with drawdowns throughout the year as high as 6%. This is our 12th consecutive year of positive returns for the F-Series of the fund.

With interest rates as low as they are and the massive headwind on governments, we believe that active management and a hedging program are an absolute requirement in the bond world. We prefer to be proactive on positioning and all the risk variables in our portfolio not reactive.

As discussed earlier, interest rates are poised to go up in 2022, central banks are telling this, our track record shows that we know how to listen and navigate this environment.

At the time of writing, we estimate the fund’s duration at about 2 years, with an all-in yield to maturity of about 2.9%. That’s better than the majority of index funds, with less than 2% income and 8 years of duration risk. We have layered-in floating rate exposure (about 35% of the fund), so as rates increase this year, our floating rate hedges will mean more yield for the portfolio with less negative mark to market that usually comes with rising rates.

Alternative Credit Opportunities Fund (NACO)

This was NACO’s first year in the alternative fixed income space, we launched in the middle of May 2021. Unsurprisingly, the fund has tracked the Credit Ops reasonably well throughout the year. Since the two funds weren’t created at the same time, there are some idiosyncratic positions that have decoupled performance for a few months. But overall, we expect NACO to correlate highly with the Credit Ops.

Following year end, with rates expected to go up in the front end of the yield cure, we layered some additional interest rate hedging, converting fixed rate bonds to floating, effectively reducing the fund’s duration by an additional 1.2 years (to 1.5 years). Once short-term rates start to move higher, we expect to increase our allocation to investment grade bonds, at the expense of high yield.

Credit Income Opportunities Fund (Credit Opps)

2021 was a good year for the Credit Ops, with a total return net of fees of 6.08%. Relatively range bound credit spreads coupled with high income (average of 6-7% throughout the year) allowed the strategy to do what it does best: generate income.

Following year end, with rates expected to go up in the front end, we layered some additional interest rate hedging, converting fixed rate bonds to floating, effectively reducing the fund’s duration by an additional 1.1 years (to 1.4 years). Once short-term rates start to move higher, we expect to increase our allocation to investment grade bonds, at the expense of high yield.


2022 will be the year of monetary policy normalization. We have been preparing for it since the fall of 2021, when it became clear that inflation was no longer transitory. We’ve lowered our duration, raised cash and we’re evaluating some credit hedges across all our funds. And we’re ready for higher rates.

Until next month,

Mark & Etienne
Ninepoint Partners


Fund 0.8% 0.3% 0.1% 0.6% 0.3% 3.7% 3.3% 4.5% 4.2%


Fund 0.5% 6.1% 1.1% 2.3% 6.1% 8.9% 6.0% 5.8%

1 All Ninepoint Diversified Bond Fund returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at December 31, 2021 1 All Ninepoint Credit Income Opportunities Fund returns and fund details are a) based on Class F units; b) net of fees; c) annualized if period is greater than one year; d) as at December 31, 2021. 

The Risks associated worth investing in a Fund depend on the securities and assets in which the Funds invests, based upon the Fund's particular objectives. There is no assurance that any Fund will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Fund will be returned to you. The Funds are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Fund's prospectus or offering memorandum before investing.

Ninepoint Credit Income Opportunities Fund is offered on a private placement basis pursuant to an offering memorandum and are only available to investors who meet certain eligibility or minimum purchase amount requirements under applicable securities legislation. The offering memorandum contains important information about the Funds, including their investment objective and strategies, purchase options, applicable management fees, performance fees, other charges and expenses, and should be read carefully before investing in the Funds. Performance data represents past performance of the Fund and is not indicative of future performance. Data based on performance history of less than five years may not give prospective investors enough information to base investment decisions on. Please contact your own personal advisor on your particular circumstance. This communication does not constitute an offer to sell or solicitation to purchase securities of the Fund. 

Ninepoint Partners LP is the investment manager to the Ninepoint Funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), other charges and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. The indicated rate of return for series F units of the Fund for the period ended December 31, 2021 is based on the historical annual compounded total return including changes in unit value and reinvestment of all distributions and does 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. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction.

The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners LP. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners LP is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: CIBC Mellon GSSC Record Keeping Services: Toll Free: 1.877.358.0540

Historical Commentary