July Outlook
July 21, 2021  |  By Hank Cunningham

This is a challenging environment for fixed income investors. Despite a dramatic economic recovery, rising inflation and tight labour markets, we have seen bond yields fall a full 50 basis points since the end of March. Markets have decided that inflation will be transitory. Already, we have seen corrections in commodity prices and inflation expectations. In the background remain two fundamentals that act as long-term constraints on bond yields, namely demographics and technology. Further, the U.S. is increasingly perceived to be in a debt trap where there is no apparent way out as any fiscal or monetary restraint would be counterproductive.

The period of lower-for-longer bond yields is likely to persist as the path out of the pandemic is clarified. Could yields go lower? Yes they could, with 1% being a realistic target. They could also move higher, with 2% as a logical level, given the poor fundamentals for bonds, namely negative real yields. Thus, the environment for fixed income investors will remain challenging and it is likely that returns will continue to be modest.

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