Why it’s nearly time to reduce exposure to longer-term bonds GlobeInvestor
as long-term yields climb. It might soon be time to reduce exposure to long-term bonds and favour the short term instead.Global manufacturing purchasing managers indices have been declining considerably since reaching a peak in December 2018, owing to trade tensions and geopolitical events such as Brexit.
The services sector remains expansionary globally, including in the U.S., showing a resilient consumer and signaling economic strength. This gives us confidence that we’re not headed for a broad-based economic downturn. In fact, growth expectations have been much lower than warranted, as the sharp recovery in the Citi Global Economic Surprise index over the last six weeks indicates.We expect the turnaround in actual growth and expectations to put upward pressure on U.S. long-term yields by year end.While firmer global and U.S. growth will lift Canadian yields, Canada’s own domestic strength will also drive its long-term yields higher.
While we are following developments related to the Canadian federal election, the outcome won’t impact our outlook as we don’t foresee any candidate implementing policies that would materially affect the country’s growth or inflation prospects.At the front end of the curve, easy monetary policy will keep interest rates low.
Unlike the Fed, the Bank of Canada left its key policy rate unchanged in September. Its target rate should remain at 1.75% through the end of this year, where it has been since October 2018. But given the context of low unemployment and inflation close to target, this policy stance remains accommodative and should keep Canadian short-term rates low.
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