Bond yields moved higher and their prices declined in August. Optimism about both the pace of the recovery and the potential for an effective vaccine being found in the next few months led investors to anticipate interest rates would eventually rise sooner than anticipated. Also contributing to the increase in yields was ongoing new issue supply pressure, particularly from governments continuing to fund massive support programmes. The rise in COVID-19 cases in several U.S. states, as well as a second wave in some European countries, was largely ignored by the bond market. The FTSE Canada Universe Bond index returned -1.13% in the month.

Economic forecasters may eventually run out of letters to describe the current economic cycle’s rapid decline and expectations for a subsequent recovery:

  • U-shaped. A relatively sharp decline in economic activity (i.e. recession) followed by little growth for a prolonged period before eventual recovery.
  • V-shaped. A sharp decline followed by a rapid rebound in activity to previous levels.
  • L-shaped. A sharp decline without a subsequent recovery.
  • W-shaped. Following a sudden decline in the economy it experiences a partial recovery. However, a second wave of the pandemic may lead to another decline in activity, thereby necessitating a second recovery.
  • Z-shaped. A sharp decline in activity followed by a robust recovery that leaves activity markedly higher than prior to the recession.

In August, we got another letter, with suggestions of a K-shaped recovery in which some sectors of the economy quickly recover from the downturn (e.g. finance, real estate, and retail) while other sectors fail to rebound very much (e.g. hotels, travel, and entertainment).