Outlook and Strategy

We continue to believe that yields are likely to move higher. The global economy continues to grow in 2018 and most central banks are reducing the amount of monetary stimulus. The minutes from the FOMC’s March meeting, that resulted in an increase in the overnight rate by 25 basis points, were released in April and show the decision to increase was unanimous with all members agreeing that the economic outlook had strengthened in recent months. Many members expressed greater confidence in a higher inflation outlook.

The Bank of Canada left the overnight rate unchanged at 1.25% on April 18th. However, its statement noted an upward move in inflation and wage growth, which is consistent with the economy operating at or close to full capacity and reinforces their view that higher interest rates will be warranted over time. It is possible that another increase could come at the May 30th meeting, however that would probably require a series of very strong economic data before then. Instead, the BoC is more likely to act on July 18th, conditional on both continued strong economic data and some resolution to trade concerns with the US. While there have been positive signals on NAFTA renegotiations from trade negotiators, there has been no formal agreement.

Given our view that yields are likely to move higher, we continue to maintain our defensive position in bond portfolios with the portfolio durations slightly shorter than their benchmarks. We remain overweight the corporate sector as creditworthiness remains good, however corporate yield spreads are not particularly attractive and therefore we believe it prudent to reduce corporate exposure.

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