April Outlook
April 12, 2019  |  By Hank Cunningham

Bond yields are at what we believe to be the lows for the foreseeable future. Economic conditions are constructive with no recession in sight. There is little upward pressure on yields now either. As such, we see 10 year U.S. Treasury yields settling into a range of 2.40 – 2.80%. It would take further proof that economies are still growing, along with modest upward pressure on inflation and wage growth for yields to break out from here. As well, a breakthrough in the important area of trade would add impetus to any upward yield movement.

Canadian bond yields are so low compared to the U.S. (our ten-year is 80 basis points lower) that we are not attracting much in the way of foreign investment flows. The sharp drop in 5-year yields, and thus mortgage rates, augurs well for the housing market.

The corporate bond market, both investment-grade and high-yield, remains solid; yield spreads narrowed in March.

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March Outlook
March 11, 2019  |  By Hank Cunningham

After the Federal Reserve was joined on the sidelines by central banks in Canada, Europe, Australia and China, the bond market moved to a state of equilibrium, as bond yields respond to natural market forces.

Monetary policy moved away from further tightening in response to mounting evidence of slowing global economic growth. Some pundits are calling for rate cuts by the central banks.

This recency bias ignores the fact that global growth remains positive but at a slower pace. The U.S. economy is not immune to global conditions and there has been slowing in several key sectors such as auto sales, consumer confidence and home sales. At the same time, markets are catching a whiff of inflation, which has resulted in a steepening of the yield curve, particularly in the widening spread between 10- and 30-year Treasuries. The 30-year bond yield has added 15 basis points since the beginning of the year. Inflation expectations snapped back to near 2% on a 6% increase in commodity prices and wage gains.

There is little stress in the investment grade and high yield markets.

Meanwhile, global bond yields fell sharply. The German ten-year bund sunk to a mere 5 basis points! Thus, the U.S. bond market remains the high-yielding beacon among global bond markets and continues to attract international investors, especially given the strong dollar. Against this tug-of-war, U.S. ten-year bond yields could fall to 2.50%. The Fed is willing to tolerate inflation running above its 2% target, so if inflation does pick up further, upward bias would then return to bond yields, perhaps pushing them to 3%.

Canada experienced a dramatic slowing in GDP in Q4, with weakness in trade and retail sales evident. The Bank of Canada moved to the sidelines and, in a dovish announcement, pared its growth estimates considerably, leaving little doubt that it will remain on the sidelines indefinitely. Thus, Canadian fixed income investors are facing a period of flat to declining yields.

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February Outlook
February 5, 2019  |  By Hank Cunningham

With the dramatic shift away from tightening by the Federal Reserve, the bond market will react to natural forces. Yields are locked in a narrow trading range with the ten-year anchored close to 2.70%. The two-year note slipped to 2.50%, thus contributing to a modest steepening in the yield curve. Conditions in the corporate bond market, both investment grade and high yield, have improved to a more normal state, with a steady flow of primary issues accompanied by narrowing spreads.

The bond market appears to be in a state of equilibrium, as inflation ebbs and growth slows. The ten-year yield should trade in a range of 2.50% to 3.00%. Close attention should be paid to inflation but any serious uptick seems unlikely.

The U.S. faces an avalanche of new Treasury issuance to fund its swollen deficit and it will continue to reduce its balance sheet, but on a flexible basis.

At the margin, the U.S. dollar could soften and with improvement in energy pricing and in other key commodities, the Canadian dollar could benefit further.

Fixed income investors can therefore look forward to another year of modest returns, in the 2% to 4% range.

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