February 8, 2021 | By Hank Cunningham
Higher bond yields are on the way. The market is focused on reflation and there are a number of factors contributing to this analysis, namely:
- Massive federal deficits
- Soaring Money Supply; up 25% year-over-year, but turnover is still low
- Monetary easing; the Federal Reserve favours inflation running higher than its 2% target
- Commodity prices up 13% in the last twelve months
- Weaker U.S. dollar
- Inflation expectations are at six-year high
While it appears that deflationary forces are ebbing, they have not disappeared. Japan is the model for not being able to boost inflation owing to the twin deflationary forces of demography and technology.
CPI estimates are for a 2.2% increase in 2021, perhaps reaching 3% at its highest.
Corporate bond yields will compress further with government yields but will not fall in nominal terms. Therefore, we expect poor returns in government bonds as we anticipate the U.S. ten-year yield to climb towards 1.50%. Corporate bonds will produce modest positive returns at best.