Forecast for fixed income

Recent comments on monetary policy and asset demand offer insight on where fixed income is headed.

In a monthly fixed income report, National Bank reflects on monetary policy both north and south of the border, noting that both the Bank of Canada and Federal Reserve will likely raise their policy rates higher over time.

However, National Bank outlines economic challenges that could affect central bank tightening.

For example, while the central banks view weakness in equity markets as a normal adjustment to higher long-term rates, other factors are also at play in the markets, including concerns about slower global growth and U.S.-China trade tensions, which weigh on investment and commodity prices.

Inflation risk is also a factor, says the National Bank report, if companies pass higher wage costs on to consumers. Higher rates also weigh on housing.

While such uncertainties for economic projections have grown, the bank says it hasn’t yet changed it view for monetary policy normalization.

“We continue to see the Canadian overnight rate at 2.5%, and the upper bound of the target fed funds range at 3.0% at year-end 2019,” says the report.

Aligning with that forecast, one year from now the bank sees the 10-year Canadian government bond yielding about 3.10%; the 10-year Treasury, about 3.5%.

Read the full National Bank fixed income report.

ESG demand in fixed income grows

In other fixed income news, European research from Cerulli Research Associates finds that ESG criteria are increasingly being applied to fixed income, with demand growing in all segments.

While ESG assets under management in European fixed income funds are less than half of those in equity funds, net new flows to European fixed income funds have reached more than US$11 billion per annum over the last two years, says a Cerulli release.

ESG data and ratings are now available for most investment-grade credit issuers as well as a large proportion of high-yield issuers, says the release. Further, innovations include green bonds, social bonds and bonds linked to the UN’s sustainable development goals, which the firm expects will increase to meet growing investor demand.

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Why and how to address clients’ ESG values

Evaluating nuclear energy through an ESG lens