December Outlook
December 10, 2018  |  By Hank Cunningham

The economic outlook has dimmed during the past two months. Both the Federal Reserve and the Bank of Canada have softened their tone. While the Fed is almost certain to increase the Fed Funds rate in December, it might be the last hike for a while.

There are a host of positives still in place in the U.S. economy:

  1. Buoyant retail sales and consumer confidence.
  2. Increased business investment and industrial production.
  3. Tight labour market.
  4. Solid PMIs.

Global growth has been pared slightly by the OECD for 2019 but is still expected to be at 3.4%.

With one more Fed Funds hike coming and with inflation ebbing, the ten-year U.S. bellwether bond yield will not be climbing back to 3.24% anytime soon. That is looking like the market top for now. However, there is not a strong case for bond yields to fall further from current levels either, as a result of all the positive factors still present. Inflation may be ebbing but it is still in the 2% area, leaving real yields barely positive including the Fed Funds rate. The U.S. Treasury had to issue record amounts of bonds to finance the whopping U.S. deficit. With the flatter yield curve, the Treasury may begin to ramp up its issuance of long-term bonds.

Our conclusion is that there is no recession coming soon and that the fears surrounding the corporate credit market, both for investment grade and high yield bonds, are overblown. This is not to ignore them, but even with the recent widening of spreads from government bonds, corporate bond yield spreads are still historically tight. Long-term yields are near the bottom end of what we estimate to be the new trading range of 2.75% to 3.24%.

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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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