March Outlook
March 9, 2021  |  By Hank Cunningham

Last month, we detailed the factors in place that would produce higher yields. These factors remain and thus, we conclude that bond yields should continue to climb. While the bond market may stabilize around current yield levels, the trend higher in real yields is likely to continue; our target for the U.S. 10-year is in the 1.75-2.00% range.

Fundamentals include:

  • Massive federal deficits
  • Soaring Money Supply; up 25% year-over-year, but turnover is still low
  • Monetary accommodation; the Federal Reserve favours inflation running higher than its 2% target
  • Fiscal stimulus: another $1.9 trillion
  • Commodity prices are up 13% in the last 12 months
  • A weaker U.S. dollar
  • Inflation expectations are at a six-year high
  • Record borrowing needs by the U.S. Government

The Federal Reserve has shown no inclination to either taper its bond purchases or interfere with the long-term bond market. It is a distinct possibility that record borrowing by the U.S. Treasury may cause occasional disruptions in the bond market.

CPI estimates are for a 2.2% increase in 2021, perhaps reaching 3% at its highest. One school of thought has this as a temporary phenomenon with inflation easing back as the year progresses.

Corporate bond yields will compress further with government yields but will not fall in nominal terms. Therefore, we continue to expect corporate bond returns to outpace those of government bonds but those returns will be modest at best. 

+Full Report