(Bloomberg) -- A Toronto-based hedge fund that outperformed the Canadian corporate bond market three years in a row is buying up longer-term notes in anticipation that the Bank of Canada will soon make its first rate cuts since 2020. 

Amplus Credit Income Fund is adding Canadian government bonds due in under five years, betting on a lower-rate environment. It’s a change of strategy — over 70% of Amplus’s holdings were due in one year or less as of the end of January, according to its latest performance report.

“The last thing we want is to have no duration and rates go down,” said Andrew Labbad, senior portfolio manager at Wealhouse Capital Management, the Toronto-based money manager behind the Amplus fund. While the firm can’t time the market, he said, “the skew is to the downside” on rates. 

A slower-than-expected rise in January consumer prices may hasten rate cuts. The inflation surprise sent bonds surging on Tuesday, pushing the yield on benchmark two-year Canada government debt to around 4.145%, down by more than 15 basis points on the day. Traders boosted their bets on rate cuts in the first half of the year.

As interest rates rose alongside strong economic data, the fund began covering short positions in government securities and going long corporate bonds, Labbad said. The C$320 million ($237 million) fund has been gradually adding more rates exposure via Canadian government bonds since late January. 

Amplus has returned 61% since its inception in July 2020 and gained almost 13% last year, according to its website, outperforming a Bloomberg index of Canadian investment grade corporate bonds that returned 8.2% in 2023. Hedge funds typically target a higher yield by adding leverage or using derivatives.  

Earlier this month, Bank of Canada Governor Tiff Macklem gave a speech in which he said monetary policy can’t solve housing shortages that are driving up costs. Some observers took that to mean policymakers may consider looking beyond housing-related inflation as they weigh how long to keep rates at current levels.

“Rates will go lower in the long run, it’s just how long we will stay this high,” Labbad said. 

 

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