November Outlook
November 7, 2018  |  By Hank Cunningham

The U.S. ten-year yield reached our year-end target of 3.25% briefly and has fallen modestly. All signs point to higher yields at all maturities. The Federal Reserve and the Bank of Canada are clear in their goal of “normalizing” interest rates, likely leading to a further increase of 100 basis points in administered rates during the next twelve months.

As for market yields, they are heading higher as the employment market remains strong with the unemployment rate at 3.7%, seven million unfilled jobs, and wage growth kicking in above 3%. Besides this, the U.S. Treasury increased its debt sales to $83 billion per quarter and the Fed continues to unwind its balance sheet.

Corporate bonds, both investment grade and high yield, suffered in October but remain at relatively narrow spreads from government bonds.

In short, we believe bond yields will continue to grind higher with a target of 3.5% to 4% for the bellwether U.S. ten-year.

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October Outlook
October 10, 2018  |  By Hank Cunningham

September brought higher yields at all maturities with the bellwether U.S. ten-year tacking on 20 basis points to reach 3.06%. The employment report at the beginning of the month was generally strong with average hourly earnings reaching a nine-year high of 2.9%. The Federal Reserve followed this with another increase of 25 basis points, citing the strong economy and leaving little doubt that there would be another such increase in December.

The Bank of Canada was in a cautious mode, mostly as a result of the uncertainty surrounding trade talks. It did foresee gradual interest rate hikes over time, but dismissed the 3% inflation numbers as transitory. Now that the Fed has indicated that it will continue to remove monetary accommodation and following the trade agreement, the Bank of Canada will raise its key lending rate later this month.

Globally, bond yields inched higher. The ECB’s press conference was a yawner but, more importantly, its QE program was cut in half as of October 1.

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August Outlook
August 8, 2018  |  By Hank Cunningham

We maintain our outlook that U.S. and Canadian bond yields will rise with a near-term target of 3.25% for the U.S. ten-year. While there was some upward movement in global bond yields in July, the yawning gap between those yields (mostly those in the Euro zone) continues to attract safe-haven flows to the U.S. bond market.

There can be little in the way of definitive analysis on the net effect of the tariff impositions on economic growth. At the margin, growth will be less than consensus, while inflation will be higher.

The U.S. credit markets will feel the weight of the burgeoning Federal Deficit. The Treasury announced a significant increase in borrowing for the current quarter with a total issuance of $78 billion planned with an increased emphasis on longer-term issuance. Combined with the ongoing reduction in the Fed’s balance sheet, the net result, again at the margin, will be upward pressure on market yields.

The Federal Reserve will continue its gradual tightening and will be joined by the Bank of Canada.

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July Outlook
July 9, 2018  |  By Hank Cunningham

Given the strong fundamentals for the U.S. economy and the accompanying rise in inflation, ten-year yields should move above 3% soon, with a year-end target of 3.25% a distinct possibility.

The Federal Reserve and the Bank of Canada will continue to withdraw accommodation at a measured pace and thus will move their respective key short-term rates ever closer to “normal.”

Overhanging the bond market is the possible detriment to global growth arising from the tussle over tariffs. Neither the Fed nor the Bank of Canada has made any downgrades thus far to their respective forecasts.

Credit markets have displayed some nervousness understandably but, overall, they remain well-behaved.

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