September Outlook
September 15, 2021  |  By Hank Cunningham

The outlook remains challenging for fixed income investors. Fixed income securities are the most expensive asset class as nominal yields remain substantially below the rate of inflation. Of late, there has been a discernible shift in the consensus that recent inflation prints will prove to be transitory as witness the noticeable leap in labour costs. Inflation is the enemy of bonds. The higher the rate of inflation, the faster the erosion of returns for fixed income securities.

The Fed is preparing the market for the beginning of the tapering of its massive monthly bond purchase program of $120 billion. At the margin, these developments favour an upward bias to bond yields, which is more likely given the probability of even more fiscal stimulus.

It is possible that the bellwether U.S. ten-year note will reach 1.50% by year end. This modest uptick will ensure the continuation of moderate total returns for bonds.

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August Outlook
August 25, 2021  |  By Hank Cunningham

The outlook remains challenging for fixed income investors. While bond yields have risen twenty basis points from their early August lows, they remain well below the rate of inflation. Of late, there has been a discernible shift in the consensus that recent inflation prints will prove to be transitory. Inflation is proving to be stickier than previously thought. Also, the Fed is preparing the market for the beginning of the tapering of its massive monthly bond purchase program of $120 billion. At the margin, these developments favour an upward bias to bond yields, which is more likely given the probability of even more fiscal stimulus.

Overall, the lower-for-longer environment for yields will persist. Fixed income investors will thus face a period of modest returns.

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July Outlook
July 21, 2021  |  By Hank Cunningham

This is a challenging environment for fixed income investors. Despite a dramatic economic recovery, rising inflation and tight labour markets, we have seen bond yields fall a full 50 basis points since the end of March. Markets have decided that inflation will be transitory. Already, we have seen corrections in commodity prices and inflation expectations. In the background remain two fundamentals that act as long-term constraints on bond yields, namely demographics and technology. Further, the U.S. is increasingly perceived to be in a debt trap where there is no apparent way out as any fiscal or monetary restraint would be counterproductive.

The period of lower-for-longer bond yields is likely to persist as the path out of the pandemic is clarified. Could yields go lower? Yes they could, with 1% being a realistic target. They could also move higher, with 2% as a logical level, given the poor fundamentals for bonds, namely negative real yields. Thus, the environment for fixed income investors will remain challenging and it is likely that returns will continue to be modest.

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