Amplus Q1 2025 Commentary – Preparation for the Majors

As we approach The Masters, golf’s first and arguably most important major championship, one can only wonder what the amount of preparation and dedication it takes for the best golfers in the world to qualify and compete for such a prestigious event. Mike, Partner and Portfolio Manager on the Amplus Credit Income Fund, is an avid golfer who knows firsthand the precision and commitment the sport demands — which might explain why Andrew, Managing Partner and fellow PM, has opted to stick to credit markets instead.

The Amplus Credit Income Fund (ACIF) is inspired by this upcoming tournament, as we strive to bring our A-game through the same level of dedication and discipline while facing the upcoming Tariff-induced volatility ahead.

We are pleased to report in our latest update that the ACIF achieved +1.85% for the first quarter of 2025.

Here are some of the major contributors to the ACIF performance in Q1 2025:

• ACIF held a credit duration of ~3.5 years, near the Fund’s historical low.
• Investments in high-coupon callable bonds continue to bear fruit, as they get extended past their first call date.
• Credit selection in names with asymmetric return profiles such as Cigna (take-out), Algonquin Power (take-out), Albertsons (take-out) and Bell (tender).
• Allocating and rotating capital between the cheaper of Canadian and U.S. markets throughout the year. Despite choppy markets, IG investors welcomed record credit issuance this quarter at large concessions, mainly throughout March.
• Profitably trading interest rates as volatility picked up in the space, while holding a core long position to hedge our credit exposures.

Credit Outlook

As discussed in our Q4 commentary, ACIF entered 2025 with discipline as we anticipated volatility to pick up while the market was discounting uncertainties including: Trump 2.0, low political support in many western nations, sticky inflation above target, slowing immigration, heightened geopolitical tensions and threats of high tariff on goods and services.

Like professional golfers who plan for unforeseen “bad bounces” through process and discipline, Amplus was well-positioned for the escalation of the “trade war” and took advantage of the volatility throughout the quarter.

To start the year, our credit exposure was 50% of index credit duration, or close to 3 years. This positioning would be near Amplus’ historical lows. As credit spreads in Canada and the U.S. have generally widened by 15 bps YTD, we are slowly becoming more bullish on select pockets of credit that have been unjustly hit by tariff news. Of importance, we remain flat auto exposure, as we think there will be a better entry point via new issues in the months ahead.

CREDIT PERFORMANCE – U.S. vs. CANADA

Despite the increased volatility and poor-performing equity IPO market, credit markets continue to see supply at record levels. Q1 2025 saw record supply for this time of year and the second heaviest quarter ever in terms of volume with $583bn of debt issued. This includes highlights like the Mars (MARS) acquisition financing for $26bn as well as Synopsys (SNPS) acquisition financing for $10bn.

Up until March, most deals were coming at negative concessions, with bank syndicates aggressively pricing deals as investors had too much cash to put to work. Investors were outbidding themselves to get enough product in. We did not see this FOMO-like behaviour as healthy and sustainable. We remained very disciplined on our fair-value levels and passed on many deals which came through our target. Case in point, Enbridge came to market in late February, immediately traded offside, and quickly moved 10-15bps wider within one week. Interestingly, we felt that dealers were heavy on Enbridge bonds ahead of the deal, and we managed to buy bonds via secondary markets the week before supply came at 10bps cheaper to where the new 3-year maturity came, with more bonds up for sale. We often wonder why investors are willing to pay up for a new issue when bonds are very readily available in secondary markets.

In March, we finally saw new bond offerings come with larger concessions of 8-10 bps, which was a good entry point to add exposure in credit, while prudently selling some outperformers. With the amount of supply forecasted for Q2, we remain patient to add risk as we think larger concessions are here to stay.

Interest Rate Outlook

So far in 2025, we gradually reduced our interest rate by 50% as rates continue to rally on the tariff headlines. Shown below, most of the volatility observed is in sovereign rates, not corporate credit. As countries try to nationalize themselves, they have promised stimulus measures to prop up the economy. This form of fiscal policy can be dangerous and could lead to inflation and higher bond yields down the road. For example, the German government unveiled their own fiscal bazooka to combat tariffs, sending German bund yields violently higher.

HOW MUCH MORE VOLATILE ARE INTEREST RATES v.s. CREDIT SPREADS?

A main theme we are carefully watching is the growing threat of “stagflation”, defined as low growth and high inflation. The most recent FOMC committee meeting hinted at this very notion. 2025 GDP growth was revised down notably by 0.4% to 1.7% while Core PCE inflation was revised higher to 2.8% from 2.5%.

Central bankers fear stagflation, as it’s very hard for them to control. Considering Trump’s tariff tactics, the Fed’s worst nightmare of stagflation setting into the economy may be coming true. Fed Chair Powell was recently quoted in his press conference saying “progress on inflation is delayed”. While Mr. Powell was famously able to explain away the rapid boost of inflation post-Covid as “transitory”, even he is now unsure on how to handle current inflationary pressures.

Thanks to Vance and Zelensky’s live feud, we are more aware than ever that an ocean separates North American from Europe, but financial markets remain intertwined. With German bond yields rising the most since the fall of the Berlin wall as Germany readied a very large spending bill to combat tariffs and support their economy, Canada and many other countries are also following suit. These policies will further put pressure on inflation and interest rate yields.

GERMAN AND CANADIAN 10Y BOND

Forward Outlook

What are we most excited about? With this month’s BoC rate cut, the curve is finally normalizing — allowing us to own rate risk at a positive carry given our funding continues to go down while term rates remain steady. The Amplus portfolio currently yields 5.75%, the most in 3 months. We continue to see our high-coupon investments get redeemed as companies look to refinance their debt at cheaper all-ins, allowing us to redeploy capital into credits that are trading at the widest levels since pre-Trump elections.

What does this mean for bond investors? We are entering a period of elevated interest rate volatility, creating massive opportunities for active long/short strategies like the ones at Wealhouse, specifically for the Amplus Credit Income Fund.

Thanks to Mike’s golfing experience, we continue to always remain vigilant, because the “game isn’t over until the last putt is made”. In our case, the last putt gets reset everyday. The Amplus team has taken this period of volatility to prudently increase credit exposure while actively managing interest rate exposure across the yield curve. We are looking forward to further opportunities into 2025 for our clients and won’t stop until “the last putt is made”.

Disclaimer

This Commentary expresses the views of the author as of the date indicated and such views are subject to change without notice. Wealhouse has no duty or obligation to update the information contained herein. This Commentary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Wealhouse believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.