June Outlook
June 10, 2021  |  By Hank Cunningham

There is a great divide in inflation forecasting. A large contingent of forecasters, led by the Fed and the Treasury Secretary, believe the current pickup in inflation is transitory and that it will subside after the long-term deflationary factors such as demographics, technological advancements and debt kick in. Another camp views the combination of massive monetary and fiscal accommodation, along with a tight employment market and rising wages, as a cyclical phenomenon and one which will produce higher yields.

The Fed, despite its transitory stance, is tip-toeing towards the first reduction in its bond-buying program. No less than five Fed officials have been quietly espousing a move towards tapering and it was likely discussed at the recent FOMC meeting. Chair Powell will proceed cautiously.

The economic recovery will continue to accelerate and move past pre-pandemic growth levels. It is difficult to see how bond yields can fall from current levels with the ten-year yield substantially below the inflation rate. The recent fall in bond yields may be one more example of “not fighting the Fed.”

At the margin, bonds are expensive and their yields could creep higher, with 2% as a target on the U.S. 10-year Treasury. Credit markets remain healthy. Investors can look forward to modest positive returns.

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May Outlook
May 12, 2021  |  By Hank Cunningham

After the pause in April, it is likely that bond yields will resume their upward trend. Bonds offer poor value at present levels, especially with rising inflation pushing real yields to even deeper negative territory. The lines are drawn between those forecasting a transitory increase in inflation and those looking ahead to accelerating inflation. With surging commodity prices, firming wages and massive monetary and fiscal stimuli, the odds favour a lasting pickup in inflation. Ultimately, the Fed will need to address its accommodative stance, and at least, move forward the timing of the first hike in the Fed Funds Rate and/or a tapering of its bond purchases. Bond yields should push to 2% and beyond.

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April Outlook
April 13, 2021  |  By Hank Cunningham

Higher yields likely lie ahead for bonds; the near-term target is 2% for the ten-year U.S. Treasury and 2.25% later this year.

The factors that led to recent upticks in yields remain in place, principally massive fiscal and monetary stimuli. Consensus had expected that the recovery would return North American economies to pre-pandemic growth rates. This no longer appears to be the case, as the recovery is gaining strength, producing new record highs in key statistics and, importantly, is producing an uptick in inflation, which may not be just transitory. The massive fiscal and monetary stimuli should continue to feed into growth; the Fed has stated its willingness to allow inflation to exceed its 2% target for an uncertain amount of time before taking action to rein in monetary stimulus.

The result will likely be higher bond yields. Corporate yield spreads will remain compressed but corporate bond yields will push higher with the rising government yields.

Thus, fixed income performance will be modest at best.

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