February Outlook
February 8, 2021  |  By Hank Cunningham

Higher bond yields are on the way. The market is focused on reflation and there are a number of factors contributing to this analysis, namely:

  • Massive federal deficits
  • Soaring Money Supply; up 25% year-over-year, but turnover is still low
  • Monetary easing; the Federal Reserve favours inflation running higher than its 2% target
  • Commodity prices up 13% in the last twelve months
  • Weaker U.S. dollar
  • Inflation expectations are at six-year high

While it appears that deflationary forces are ebbing, they have not disappeared. Japan is the model for not being able to boost inflation owing to the twin deflationary forces of demography and technology.

CPI estimates are for a 2.2% increase in 2021, perhaps reaching 3% at its highest.

Corporate bond yields will compress further with government yields but will not fall in nominal terms. Therefore, we expect poor returns in government bonds as we anticipate the U.S. ten-year yield to climb towards 1.50%. Corporate bonds will produce modest positive returns at best.

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January Outlook
January 12, 2021  |  By Hank Cunningham

Now that the U.S. ten-year yield is comfortably over 1% and inflation expectations are well over 2%, what is next?

The new U.S. administration will likely be expansionary, providing even more stimulus. Along with the vaccine rollouts, growth prospects are improving. This should continue to heighten inflation worries. There remain headwinds for inflation, namely: demographics, technology and excess capacity.

Nevertheless, we favour the reflation argument, which should produce higher bond yields, with the U.S. ten-year on its way to 1.25-1.50% in the medium term. With this forecast in mind, corporate bond yields have likely reached their nadir and will thus produce only modest returns henceforth.

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December Outlook
December 8, 2020  |  By Hank Cunningham

Our view remains that nominal bond yields will trend higher. With Central Banks anchoring short-term yields indefinitely, this argues for a steeper yield curve. The question remains about how serious the Federal Reserve will become when the ten-year breaches 1%. Thus far, there has been no mention of yield curve control.

Inflation expectations resumed their climb and are approaching 2%. With upwards pressure on prices of all kinds growing in the pipeline, it seems likely that inflation will exceed 2% in 2021, putting further upward pressure on nominal bond yields. With vaccines about to roll out and with further fiscal stimulus likely to come from the new administration in Washington, the recovery should gather pace again.

Corporate bond yields have fallen to the point where they are close to offering zero yield after inflation and are unlikely to fall further, especially in light of rising treasury yields.

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