SOGEI website background

Monthly fixed income monitor – July –August 2018

Monthly fixed income monitor – July –August 2018

Assuming some limited further deterioration in trade talks between the U.S. and its major trading partners before year end, we expect the FOMC to be cautious taking the fed funds target range to 2.00%-2.25%. In the longer portion of the yield curve the market will face crosscurrents. International uncertainty will tend to limit rate increases while Fed balance sheet normalization, softer pension-fund demand and large borrowing requirements will tend to pull rates up. All things considered, we have revised our year-end forecast for the 10-year yield slightly downward, to 3.04% from 3.18%, but left it unchanged at 3.47% for year-end 2019. While we see numerous yellow beeps on our radar screen, none are strong enough yet to turn outright bearish about the global outlook. In that context, our base case scenario (55% odds) is that the Bank will proceed with one more rate hike this year. Most likely in October when it will update its economic outlook. Looking at the longer end of the yield curve we see 10-year Canada trading around 2.57% by year end and around 3.09% in December 2019.