August Outlook
August 25, 2021  |  By Hank Cunningham

The outlook remains challenging for fixed income investors. While bond yields have risen twenty basis points from their early August lows, they remain well below the rate of inflation. Of late, there has been a discernible shift in the consensus that recent inflation prints will prove to be transitory. Inflation is proving to be stickier than previously thought. Also, the Fed is preparing the market for the beginning of the tapering of its massive monthly bond purchase program of $120 billion. At the margin, these developments favour an upward bias to bond yields, which is more likely given the probability of even more fiscal stimulus.

Overall, the lower-for-longer environment for yields will persist. Fixed income investors will thus face a period of modest returns.

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July Outlook
July 21, 2021  |  By Hank Cunningham

This is a challenging environment for fixed income investors. Despite a dramatic economic recovery, rising inflation and tight labour markets, we have seen bond yields fall a full 50 basis points since the end of March. Markets have decided that inflation will be transitory. Already, we have seen corrections in commodity prices and inflation expectations. In the background remain two fundamentals that act as long-term constraints on bond yields, namely demographics and technology. Further, the U.S. is increasingly perceived to be in a debt trap where there is no apparent way out as any fiscal or monetary restraint would be counterproductive.

The period of lower-for-longer bond yields is likely to persist as the path out of the pandemic is clarified. Could yields go lower? Yes they could, with 1% being a realistic target. They could also move higher, with 2% as a logical level, given the poor fundamentals for bonds, namely negative real yields. Thus, the environment for fixed income investors will remain challenging and it is likely that returns will continue to be modest.

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June Outlook
June 10, 2021  |  By Hank Cunningham

There is a great divide in inflation forecasting. A large contingent of forecasters, led by the Fed and the Treasury Secretary, believe the current pickup in inflation is transitory and that it will subside after the long-term deflationary factors such as demographics, technological advancements and debt kick in. Another camp views the combination of massive monetary and fiscal accommodation, along with a tight employment market and rising wages, as a cyclical phenomenon and one which will produce higher yields.

The Fed, despite its transitory stance, is tip-toeing towards the first reduction in its bond-buying program. No less than five Fed officials have been quietly espousing a move towards tapering and it was likely discussed at the recent FOMC meeting. Chair Powell will proceed cautiously.

The economic recovery will continue to accelerate and move past pre-pandemic growth levels. It is difficult to see how bond yields can fall from current levels with the ten-year yield substantially below the inflation rate. The recent fall in bond yields may be one more example of “not fighting the Fed.”

At the margin, bonds are expensive and their yields could creep higher, with 2% as a target on the U.S. 10-year Treasury. Credit markets remain healthy. Investors can look forward to modest positive returns.

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