June Outlook
June 13, 2019  |  By Hank Cunningham

The stage is set for monetary easing. Fed Chair Powell signalled as much and the market has priced in one cut in July and two more for the rest of the year. This has resulted in a modest steepening in the yield curve, as measured by the two-year-ten-year spread, mostly as a result of the plunge in the two-year yield. Presently at 1.93%, the two-year is approximately 50bps below the Fed Funds Rate.

While bond yields may ebb and flow, we are in for a sustained period of low interest rates and bond yields.

The Bank of Canada finds itself in an interesting position. With the Fed poised to ease, the bank is being pressured to follow but, given the recent strength across the Canadian economy, it may hold off for now. The loonie moved up steadily given the relatively attractive fundamental differences between the U.S. and Canadian economies. As a strong Canadian dollar represents de facto tightening, the Bank of Canada may have little option but to follow the Fed.

Credit conditions improved following the relaxation in trade tensions, witnessed in the narrowing yield spreads between corporate bonds, investment-grade, high-yield and government bonds.