Why Have Bond Yields Slipped?

by Greg Valliere, AGF Management Ltd.

WHAT HAPPENED ON THE WAY TO 2% YIELDS on the Treasury 10-year bond? Rates suddenly stopped climbing and have slipped back to nearly 1.6%. In our opinion, there are several macro factors at play:

First, Covid is still a major headwind, with the variant surging in much of the U.S. and still persistent in Canada, Brazil, India and much of western Europe. And reports of blood clots may dissuade people from getting vaccinations — even though clots are a very, very remote risk to anyone getting a shot. An over-riding question is whether the virus can be eliminated if a third of all Americans refuse to get a shot?

Second, progress has slowed on President Biden’s massive stimulus, with Congress facing a long slog, well into summer, before passing an infrastructure package that may spend less than he prefers. Some analysts are saying that stimulus will wear off in 2022, but we have a different opinion — much of it won’t be spent this year, certainly not for infrastructure. A delayed roll-out could guard against an over-heating economy this summer.

Third, bottlenecks have persisted at U.S. ports, exacerbated by a shortage of cargo ships and labor. Long delays in unloading the ships will be a headwind for the overall economy.

Fourth, the semiconductor chip shortage is a genuine crisis in the auto industry and other sectors, an economic drag that could persist for the next year.

Fifth, inflation has not broken out, ex-food and fuel, and may stay contained until the labor market clearly tightens — which may not occur until winter. Yes, there’s a red-hot bubble in housing but overall inflation has not met the Federal Reserve’s targets.

Sixth, regulatory headwinds: The Trump era of “anything goes,” with lax Washington regulations, is over. The symbol of this change is Gary Gensler, confirmed yesterday to head the Securities and Exchange Commission. He and dozens of hard-line regulators are flooding into Washington agencies, determined to curb energy producers, banks, Big Tech — you name it.

Seventh, geopolitical jitters could keep demand strong for Treasuries, as U.S.-Russia relations plummet and prospects fade for an imminent breakthrough with China. Bonds are the safe haven if geopolitics heats up.

BOTTOM LINE: We still anticipate strong economic growth — with upside risks on inflation and a much tighter labor market by year-end. But we’re not out of the woods yet on Covid, and there are other headwinds from Washington that may keep 10-year yields from hitting 2% for a few more months.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.

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This post was first published at the AGF Perspectives Blog.