Following a year of fairly robust returns, we are cautious regarding the outlook for bonds in 2020, which leads us to keep portfolio durations shorter than the respective benchmarks. Both internationally and domestically, central bankers are on hold, with no imminent plans to add to existing monetary stimulus. Indeed, the ones with the greatest amount of stimulus (i.e. negative rates) are starting to rethink the wisdom of continuing what has been an ineffective policy tool. However, current bond yields are discounting further monetary easing and will face upward pressure when it does not occur.

In addition, the safe haven bid for bonds should fade as trade tensions are partially reduced. The U.S./China Phase 1 trade agreement is scheduled to be signed by the respective leaders of the two countries on January 15th. Assuming that goes ahead as planned, the end of the threats to implement new tariffs and the partial rollback of existing ones should improve the outlook for the global economy and alleviate some of the investor pessimism that has pushed bond yields lower over the last 15 months. The improvement in sentiment will likely to have a larger impact on investment returns than the improvement in global growth, given the bilateral nature of the U.S./China trade agreement.

The completion of the negotiations to update the North American Free Trade Agreement (NAFTA) should have a more meaningful impact on Canada. Total trade between the United States, Canada, and Mexico is more than twice the amount of trade between the U.S. and China, so resolving the uncertainty in this area is important. Canadian parliamentary approval of the revised deal should occur in the next month or so. U.S. ratification by the U.S. Senate should follow, but may be held up by the impeachment trial of President Trump. In particular, the ratification of the new agreement should lead to increased business investment spending as the uncertainty of the negotiations is finally removed. Firms which had been holding off new investments until they were sure that the rules would not change unfavourably can now proceed.

As noted above, we are keeping duration shorter than the respective benchmarks. However, given the unpredictable nature of the U.S. administration, we are loath to take positions radically different than the benchmarks. Indeed, as this is being written, the United States has dramatically escalated Middle East tensions with the assassination of a top-ranking Iranian general. With the coming year likely to have as many market-moving surprises from the White House as last year, we will keep durations relatively close to home.

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