April 9, 2018 | By Hank Cunningham
We maintain our view that the trend towards higher short-term and long-term yields remains in place.
In the near term, bond yields have entered a trading range bound by 2.63% and 3% for the U.S. ten-year note. Ultimately, the ten-year yield should reach 3.25% this year. The Federal Reserve will likely continue to normalize short-term interest rates unless there is a dramatic change in economic conditions.
The Bank of Canada is on the sidelines for now but it maintains an upbeat forecast for our economy. The consensus indicates that the Bank of Canada may not raise its overnight rate until its July meeting.
In the short term, markets have been roiled by the various tariff headlines with the net result being a flight by investors to the safe haven of the U.S. Treasury market. While there has been no noticeable deterioration in economic conditions, there has been some erosion in consumer and corporate confidence. Also contributing to the recent decline in U.S. bond yields has been lower bond yields in Europe where recent data have been weaker than consensus. The result is that U.S. yields looked relatively more attractive. Credit markets also reacted with some widening of yield spreads over government bonds.
Overall, global economic conditions are buoyant and inflation has ticked up. Labour markets are firm and wages are beginning to firm.