“Despite attractive corporate spreads, we continue to recommend caution with a focus on high quality issuers,” says BMO. “With yields already quite low, resist the temptation to chase rates lower by extending duration above benchmark.”

It notes that despite the rebound in equities, “bond yields remain at a low ebb as storm clouds dot the horizon. A notable concern is the rising possibility of a military conflict between the U.S. and Iraq, which would spark at least a short-term flight to quality.”

BMO predicts that the Federal Reserve’s FOMC meeting on September 24 will not bring any change in rates, “barring exceptionally weak economic data”.

As for new issues, the firm says that an active pipeline is expected in September, as the provinces take advantage of investor demand and low interest rates. As well, Canadian universities (McMaster, McGill, Guelph and Queen’s) are expected to come to the market. On the corporate side, “The improving market tone — indicated by the recent successful new issues — as well as a heavy corporate maturity schedule of close to $3 billion, could lead to a strong new issuance calendar in September.”