February Outlook
February 12, 2020  |  By Hank Cunningham

The trend towards higher bond yields, evident in the fourth quarter of 2019, has been interrupted by the outbreak of the coronavirus and the attendant risks to global growth. Thus far, economic data, particularly in North America, remains encouraging, but has not yet been accompanied by any meaningful pickup in inflation. There are some signs from Europe and Japan that the worst may be over for their economies. Nevertheless, the amount of negative-yielding bonds has increased by $2 trillion after this latest yield plunge. This, in turn, makes North American bonds look attractive, effectively capping bond yields. The ten-year U.S. bellwether made a double-top at 1.95%. That level may prove to be the ceiling for bond yields for the foreseeable future.

Although, at the margin, the virus outbreak might increase the odds of a rate cut by the Federal Reserve and the Bank of Canada, economic data argues for no imminent change in monetary policy.

Yields on investment-grade corporate bonds have moved to rarely-seen tight spreads versus government bond yields and thus have limited upside. The U.S. yield curve has flattened but remains positive. The U.S. ten-year note is in a trading range of 1.45% to 1.95%. To break above 1.95% would take synchronized global growth accompanied by firmer inflation. That does not appear likely to happen. Although Central Banks are monitoring carefully the economic fallout from the coronavirus, they will probably remain on the sidelines. China is throwing massive fiscal stimulus at its economy and other countries may fallow suit. This argues for some increase in bond yields and a steeper yield curve.  

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