February Outlook
February 24, 2023  |  By Hank Cunningham


Inflation is the number one issue facing fixed income markets and investors. It remains at elevated levels, with recent prints exceeding consensus estimates. Inflation has slowed in the past four months but shows signs of picking up again, particularly in the important services sector where wage growth is accelerating. It is premature to measure the impact of monetary tightening to date as it takes time for it to work its way through economies.

With recent economic data exceeding estimates and inflation still high, central banks will continue to tighten. Currently, the market, after fighting the Fed again and losing, foresees the Fed Funds Rate reaching 5.5%. That might not be the terminal rate but wherever it is, it is likely that it will stay there for the balance of 2023. The Bank of Canada may not follow in lockstep as it is concerned about the high proportion of variable rate mortgages needing to be refinanced at today’s higher rates.

The yield curve will stay inverted for a while. In the meantime, fixed income investors can earn 5% plus on short-duration bonds, thus producing positive returns with minimal risk to principal.

In summary, there will be more chapters in the bond market drama, and we expect a wide trading range of 3.25% to 4.25% on the U.S. 10-year Treasury bond. It is rapidly approaching 4% and will likely hit the upper end of our forecast level.

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