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May Outlook
May 11, 2018  |  By Hank Cunningham

Bond yields rose at all maturities in April with the yield on the bellwether U.S. ten-year note adding twenty basis points to reach 2.95%. The U.S. two-year note reached 2.50%, the highest since 2008 and its yield now exceeds the dividend yield for the Dow Jones Industrial Average.

Thus, performance was negative in most sectors of the bond market in April. It was notable that Government bonds underperformed corporate bonds by a healthy margin as credit spreads stabilized and government yields rose. The high yield market was stable and produced positive returns.

The yield curve was slightly steeper for the month but the flattening trend has resumed in May.

It was noteworthy in Canada that the Government five-year yield reached its highest level in five years and gave rise to hikes in mortgage rates. The Bank of Canada did not raise the Bank Rate and adopted a neutral tone as the Canadian economy experienced some headwinds.

Elsewhere, there was no change in the monetary accommodation by the European Central Bank or the Bank of Japan.

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April Outlook
April 9, 2018  |  By Hank Cunningham

Performance was positive in most sectors of the bond market in March. It was notable that government bonds outperformed corporate bonds by a healthy margin as credit spreads widened.

The yield curve flattened further as ten-year yields in the U.S. fell by twelve basis points while two-year yields rose by one basis point. The Canadian yield curve flattened by a similar amount.

The trend to higher bond yields was interrupted in March. Most of the fundamentals pointing towards higher short-term interest rates and bond yields remained in place; namely, buoyant labour markets, strong consumer confidence and spending, strengthening industrial production, firming inflation and increased supply of bonds. However, bond yields, as measured by the ten-year U.S. note, fell by a net twelve basis points to 2.74 at month-end.

A surprise announcement by the U.S. to impose tariffs on steel and aluminum imports sent markets reeling as it raised the specter of weaker growth and higher inflation. One estimate (BMO Capital Economics) has the CPI being 0.2% higher than it would be otherwise.

The Federal Reserve raised the Fed Funds Rate by another twenty-five basis points to 1.75%. Fed Chairman Powell, in the aftermath of his first FOMC meeting, was not hawkish, which reduced the odds of four hikes in short-term rates this year.

As for Canada, the bloom has come off our economic picture. The housing market has weakened from record levels, export growth has been sluggish and business investment has been weak. Thus, the Bank of Canada moved to a cautious stance and will likely stay on the sidelines until July. The loonie slid sharply early in the month but rebounded towards the end on NAFTA hopes, an uptick in inflation and a steady increase in energy prices.

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March Outlook
March 9, 2018  |  By Hank Cunningham

Performance was mildly positive in most sectors of the bond market in February. U.S. yields rose by more than Canadian yields at three month, two- and ten-year maturities by five basis points across the board. February saw a continuation of this year’s bear trend as the yield on the bellwether ten-year note hit 2.95% on February 21. The following factors identify the sources of rising bond yields:

  • Growing global economic growth – world growth reached 4% in Q3
  • Solid economic performance in the U.S. in almost all sectors – employment, housing, construction, manufacturing, exports, consumer spending and optimism, and vehicle sales
  • Uptick in inflation was modest but has reached 2% year-over-year
  • Buoyant labour market – wages advanced in the U.S. by 2.9% year-over-year, the most rapid pace since 2009. They recently ebbed to a 2.6% rate year-over-year
  • Increased supply – the combination of the increased deficit plus the run-off from the Federal Reserve’s balance sheet means that there will be an extra $500 billion of new U.S. Treasury supply

  • While the Federal Reserve stood pat, the incoming Fed Governor Jerome Powell left little doubt that the Fed would continue to normalize rates this year. The market now assumes that he will raise the Fed Funds Rate four times.

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    February Outlook
    February 3, 2018  |  By Hank Cunningham

    Performance was negative in all sectors of the bond market in January, except for high yield bonds.

    U.S. two- and ten-year yields rose by more than their respective Canadian maturities. January ushered in a bear market in bonds. The bellwether ten-year U.S. note rose by thirty basis points and has tacked on another fifteen basis points after the month-end. Yield curves in the U.S. and Canada steepened for the month, albeit by a modest five basis points.

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January Outlook
January 8, 2018  |  By Hank Cunningham

Performance was negative in all sectors of the bond market in December, except for real return and high yield bonds. For the year, provincials, “A” corporates and high yield bonds led the way. Canadian yields rose by more than their U.S. counterparts in December.

December’s bond market action featured one more hike in the Federal Funds Rate by the Federal Reserve. This came after further evidence of solid economic growth, emanating from the employment and housing markets, plus buoyant consumer confidence. As well, global growth continued to pick up and the European Central Bank signaled a halving in its massive quantitative easing program. For the month, U.S. three month bills gained twelve basis points, two-year yields gained eleven basis points, while the yield on the ten-year bond was unchanged. This flattened the yield curve further, putting the two-year/ten-year spread at a mere fifty-two basis points.

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December Outlook
December 8, 2017  |  By Hank Cunningham

Performance was positive in all sectors of the bond market in November with provincial bonds leading the way. The provincial index has a longer duration than the other indices and thus benefited from the yield curve flattening.

While U.S. yields rose in November, Canadian yields fell for the second straight month and Canadian bonds outperformed their U.S. counterparts. The yield curves in both countries flattened further; this meant that longer-dated bonds outperformed short- and mid-term bonds.

November’s bond market action was dominated by the political arena and the constant back and forth on the proposed tax bill and the consequences for the economy, inflation and bond yields. The bellwether U.S. ten-year note rose a net four basis points while trading in a tight range. Two-year yields rose by twenty basis points, flattening the yield curve further.

The global economic picture brightened further with the OECD now forecasting GDP at 3.6% for the next twelve months.

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November Outlook
November 7, 2017  |  By Hank Cunningham

Performance was positive in all sectors of the bond market in October with investment grade corporates outperforming high yield bonds. All sectors have displayed positive returns for the year with the exception of real return bonds.

While U.S. yields rose for the month, Canadian yields fell, reversing part of September’s trend.

Early in the month, the U.S. ten-year bond was approaching 2.50% as a result of further evidence of synchronized global growth and some signs of a pick up in inflation.. Further, market participants believed that ECB head Mario Draghi would make meaningful steps to begin to withdraw monetary stimulus.

Most bonds in the Euro zone are trading at yields well below those in the United States and this serves to limit increases in U.S. bond yields. Instead, inflation readings remained benign, running at a year-over-year pace of 1.7% in the U.S, and Draghi took only a baby step towards normalization. Thus, U.S. bond yields subsided to 2.38%, up a mere 5 basis points for the month. They have fallen further, to 2.32% since month end. The market also was split regarding the appointment of the next Fed chairman; the appointment of Powell was a victory for those favouring the continuance of moderation in monetary policy.

The most recent employment report fell short of street expectations and, importantly, displayed zero wage growth.

Turning to Canada, the economy cooled over the summer as the U.S economy picked up steam. Bond yields fell sharply and so did the loonie. The Bank of Canada has now assumed a wait and see stance and is unlikely to raise the Bank Rate in December.

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October Outlook
October 10, 2017  |  By Hank Cunningham

Performance was negative in all sectors of the bond market in September except for high yield corporates. While the Universe Index is slightly positive for the year-to-date, Federal Government bonds are now showing a negative return.

The U.S. ten-year yield rose 21 basis points in September after falling sharply in August and has tacked on another five basis points thus far in October.

There have been false starts before of bond yields rising in the U.S. What is different this time around is that global yields rose in unison last month. Economic growth in the rest of the world continued to accelerate in a synchronized fashion with even Europe and Japan recording 2% growth year-over-year. While there remains considerable monetary stimulus globally, some Central Banks such as the Bank of Canada and the Bank of Australia are beginning to normalize their policies. ECB head Mario Draghi, while doing nothing but saying a lot, is hinting that he will begin to taper bond purchases soon. The big surprise remains Canada. It reported a strong growth rate of 3.7% for the previous 12 months in what has been a balanced performance for the Canadian economy. The Bank of Canada increased its overnight rate by 25 basis points to 1% on September 6, catching many pundits by surprise. Market yields rose swiftly; two-year, five-year and 10-year Government of Canada bonds have now risen 85, 83 and 65 basis points respectively since early June. Moreover, the Canadian dollar continued to rise, touching $0.825 USD, up 13 % from its lows in May.

As the month wore on, the steam came out of the Canadian economic story, particularly with the second weak trade month in a row, as exports fell. The Loonie slid on this news.

At month-end, there were solid employment reports in the U.S .and Canada. Despite the headline decline in non-farm payrolls, largely a result of the hurricanes, U.S. household employment rose by a whopping 906,000, the unemployment rate fell to 4.2%, and wage gains perked up; increasing by 0.5% for the month and 2.9% year-over-year, the largest increase in eight years.

Canada reported an increase of 112,000 full-time jobs, a decline of one-tenth in the unemployment rate and year-over-year wage growth of 2%.

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