July Outlook
July 13, 2020  |  By Hank Cunningham

There is ample evidence that an economic recovery of some sort is taking place. After two straight months of strength in the employment sectors in the U.S. and Canada, approximately one-third of the job losses have been regained.

With yields on U.S. Treasury bonds anchored at current levels, investors continue to invest in corporate bonds, particularly investment grade. Of late, high yield bonds have stalled as concerns over default rates rise.

We believe that Government bonds are overpriced as the Fed and the Bank of Canada are pulling out all the stops to keep bond yields low. This flies in the face of burgeoning budget deficits and the attendant increase of government bond issuance. The Federal Reserve, thus far, has eschewed formal yield curve control. Both the U.S. and Canadian monetary authorities have indicated a desire to issue dramatically more long-term bonds. Ultimately, this should add upward pressure on long-term yields.

There is scant evidence of any uptick in inflation; rather, reported inflation is trending lower, even negative in some cases. However, gold prices, energy, copper and inflation-protected bonds have all caught a strong bid.

Overall, we judge government bond yields to be vulnerable to:

  1. Strengthening economy
  2. Inflation trend
  3. Bond supply

GDP forecasts point to global growth of -4% in 2020, with the U.S. and Canada forecast to grow at -6% and -6.8% respectively, rebounding in 2021 by plus 4.7% and 5.5% respectively.

For the near term, we expect no upward moves in bond yields. The recovery should be erratic and produce little to no inflation pressure. Bond yields will remain anchored near recent low levels, influenced heavily by the Federal Reserve and the Bank of Canada.

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