Hank Cunningham, fixed income strategist, Odlum Brown Limited

FOCUS: Fixed income, bonds 

MARKET OUTLOOK:

The resilience of the U.S. economy has prompted the Federal Open Market Committee (FOMC) to maintain its monetary stance for now. While it has stated that three rate reductions are possible this year, the timing of those has been pushed out. The recent consumer price index (CPI) report underscores inflation’s stickiness, meaning a rate reduction could be counterproductive. What is more probable is a gradual reduction, with the U.S. Federal Reserve’s funds rate likely to move 50 to 75 basis points lower towards the end of the year.

A similar scenario is unfolding in Canada after gross domestic product (GDP) growth picked up at the end of 2023, putting the Bank of Canada on the sidelines.

Inflation remains the key fundamental for the bond market outlook. With the recent economic strength, accompanied by escalating wages, it will likely prove difficult to reach the avowed two per cent inflation target. Should that prove to be the case, it stands to reason that longer-term bond yields will rise. This also reflects the massive borrowing requirements as there is no attempt to rein in federal deficits. In addition, the Federal Reserve is still engaged in quantitative tightening.

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One-to-five bond ladder

• Return: 0.7%

Government of Canada 0.5% December 1 2030

• Return: -0.4% 

BCE 1.65% August 16 2027

• Return: -0.56%

Total Return Average: -0.09%

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