Special Reports

June Outlook
June 7, 2018  |  By Hank Cunningham

The yield curve flattened further in May. It actually steepened early in the month when long-term rates rose quickly but this reversed and the yield spread between the two-year and ten-year U.S. Treasury ended the month at 43 basis points.

May began with a continuation of this year’s rise in bond yields. With the U.S. economy throwing off strong retail sales, manufacturing and employment reports, the U.S. ten-year yield rose to 3.11%. Then, it all changed.

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May Outlook
May 11, 2018  |  By Hank Cunningham

Bond yields rose at all maturities in April with the yield on the bellwether U.S. ten-year note adding twenty basis points to reach 2.95%. The U.S. two-year note reached 2.50%, the highest since 2008 and its yield now exceeds the dividend yield for the Dow Jones Industrial Average.

Thus, performance was negative in most sectors of the bond market in April. It was notable that Government bonds underperformed corporate bonds by a healthy margin as credit spreads stabilized and government yields rose. The high yield market was stable and produced positive returns.

The yield curve was slightly steeper for the month but the flattening trend has resumed in May.

It was noteworthy in Canada that the Government five-year yield reached its highest level in five years and gave rise to hikes in mortgage rates. The Bank of Canada did not raise the Bank Rate and adopted a neutral tone as the Canadian economy experienced some headwinds.

Elsewhere, there was no change in the monetary accommodation by the European Central Bank or the Bank of Japan.

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April Outlook
April 9, 2018  |  By Hank Cunningham

Performance was positive in most sectors of the bond market in March. It was notable that government bonds outperformed corporate bonds by a healthy margin as credit spreads widened.

The yield curve flattened further as ten-year yields in the U.S. fell by twelve basis points while two-year yields rose by one basis point. The Canadian yield curve flattened by a similar amount.

The trend to higher bond yields was interrupted in March. Most of the fundamentals pointing towards higher short-term interest rates and bond yields remained in place; namely, buoyant labour markets, strong consumer confidence and spending, strengthening industrial production, firming inflation and increased supply of bonds. However, bond yields, as measured by the ten-year U.S. note, fell by a net twelve basis points to 2.74 at month-end.

A surprise announcement by the U.S. to impose tariffs on steel and aluminum imports sent markets reeling as it raised the specter of weaker growth and higher inflation. One estimate (BMO Capital Economics) has the CPI being 0.2% higher than it would be otherwise.

The Federal Reserve raised the Fed Funds Rate by another twenty-five basis points to 1.75%. Fed Chairman Powell, in the aftermath of his first FOMC meeting, was not hawkish, which reduced the odds of four hikes in short-term rates this year.

As for Canada, the bloom has come off our economic picture. The housing market has weakened from record levels, export growth has been sluggish and business investment has been weak. Thus, the Bank of Canada moved to a cautious stance and will likely stay on the sidelines until July. The loonie slid sharply early in the month but rebounded towards the end on NAFTA hopes, an uptick in inflation and a steady increase in energy prices.

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