With bond yields moving substantially lower this year, it is not surprising to see that long term bonds outperform. At the end of November, the FTSE TMX Long Term Bond Index had gained more than 17%. That is why it is not really a shocker to see this National Bank offering as the top performing bond fund. It invests in a portfolio of bonds issued by Canadian governments and corporations that have a term to maturity of at least ten years. At the end of November, it held 42% in corporate bonds, 40% in provincial bonds, and 15% in government of Canada bonds. The duration is very high, coming in at 16.7 years, which is more than double the FTSE TMX Universe Bond Index, which is around 7 years.
Logically, there is no way this performance can be repeated going forward. While the Bank of Canada is likely to be on hold for a better part of next year, the U.S. Federal Reserve is widely expected to start moving policy rates higher sooner than later. With the duration significantly higher than the broader market, the interest rate sensitivity of this fund is off the charts. Any upward pressure on yields will result in a sharp selloff. If you hold this fund, or any other long bond fund, you may want to consider taking profits or selling your entire position and moving into something offering a shorter duration profile.