March Outlook
March 10, 2020  |  By Hank Cunningham

Fixed income investors have gone through a dramatic turn of events. Government yields in North America have plunged and are approaching zero. At the same time, corporate credit markets have witnessed a significant widening of bond yields. High yield energy bonds, in particular, have been battered.

Central banks everywhere have loosened monetary policy again. As they do not have much left in the way of ammunition, the focus has shifted to fiscal stimulus. Several countries have announced, or are about to announce, such stimulus in an attempt to stabilize their economies and fend off a recession. Substantial fiscal stimulus will provide some cushion as will sharply lower energy prices. In the meantime, there is no evidence of Covid-19 peaking and thus, economic activity will be constrained.

Wider yield spreads for corporate bonds, both investment-grade and high yield, will be a feature of the markets in the near future. The spread for investment-grade corporate bonds has already blown out to 200 basis points over U.S. Treasury notes. Some pundits believe this could widen further, to 400 basis points.

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February Outlook
February 12, 2020  |  By Hank Cunningham

The trend towards higher bond yields, evident in the fourth quarter of 2019, has been interrupted by the outbreak of the coronavirus and the attendant risks to global growth. Thus far, economic data, particularly in North America, remains encouraging, but has not yet been accompanied by any meaningful pickup in inflation. There are some signs from Europe and Japan that the worst may be over for their economies. Nevertheless, the amount of negative-yielding bonds has increased by $2 trillion after this latest yield plunge. This, in turn, makes North American bonds look attractive, effectively capping bond yields. The ten-year U.S. bellwether made a double-top at 1.95%. That level may prove to be the ceiling for bond yields for the foreseeable future.

Although, at the margin, the virus outbreak might increase the odds of a rate cut by the Federal Reserve and the Bank of Canada, economic data argues for no imminent change in monetary policy.

Yields on investment-grade corporate bonds have moved to rarely-seen tight spreads versus government bond yields and thus have limited upside. The U.S. yield curve has flattened but remains positive. The U.S. ten-year note is in a trading range of 1.45% to 1.95%. To break above 1.95% would take synchronized global growth accompanied by firmer inflation. That does not appear likely to happen. Although Central Banks are monitoring carefully the economic fallout from the coronavirus, they will probably remain on the sidelines. China is throwing massive fiscal stimulus at its economy and other countries may fallow suit. This argues for some increase in bond yields and a steeper yield curve.

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January Outlook
January 13, 2020  |  By Hank Cunningham

We believe the fundamentals are in place for further increases in bond yields this year. Global economic growth seems to have bottomed with modest strength emerging. There is a growing belief that monetary policy has done its part and now is the time for concerted fiscal stimulus. Thus far, such stimulus has been scattered but the momentum is growing. The net result will be to further buttress global economic growth. At present, and assuming further easing in global trade tensions, global growth is estimated at 2.8% for 2020 with Canada and the U.S. forecast to grow at 2%.

The odds of a recession have fallen markedly. With the Fed and the Bank of Canada on the sidelines and supporting the front end of the yield curve, the odds favour a further increase in longer-term bond yields and a steeper yield curve. Inflation has remained subdued, in the 2% region with no signs of acceleration. Similarly, wage growth has been anemic, despite 40-year lows in unemployment.

We forecast that the U.S. ten-year note will breach 2% in the near term and possibly trend to 2.25% in the first half of 2020.

Corporate bond yields will remain tight to government yields with little stress evident in the credit markets.         

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