November 7, 2017 | By Hank Cunningham
Performance was positive in all sectors of the bond market in October with investment grade corporates outperforming high yield bonds. All sectors have displayed positive returns for the year with the exception of real return bonds.
While U.S. yields rose for the month, Canadian yields fell, reversing part of September’s trend.
Early in the month, the U.S. ten-year bond was approaching 2.50% as a result of further evidence of synchronized global growth and some signs of a pick up in inflation.. Further, market participants believed that ECB head Mario Draghi would make meaningful steps to begin to withdraw monetary stimulus.
Most bonds in the Euro zone are trading at yields well below those in the United States and this serves to limit increases in U.S. bond yields. Instead, inflation readings remained benign, running at a year-over-year pace of 1.7% in the U.S, and Draghi took only a baby step towards normalization. Thus, U.S. bond yields subsided to 2.38%, up a mere 5 basis points for the month. They have fallen further, to 2.32% since month end. The market also was split regarding the appointment of the next Fed chairman; the appointment of Powell was a victory for those favouring the continuance of moderation in monetary policy.
The most recent employment report fell short of street expectations and, importantly, displayed zero wage growth.
Turning to Canada, the economy cooled over the summer as the U.S economy picked up steam. Bond yields fell sharply and so did the loonie. The Bank of Canada has now assumed a wait and see stance and is unlikely to raise the Bank Rate in December.