Seizing Current Opportunities in the Bond Market

The recent shift toward a more “hawkish” stance, along with the possibility of another interest rate hike from both the U.S. Federal Reserve (Fed) and the Bank of Canada (BoC), has led to another move higher in bond yields, reaching levels not seen in nearly two decades. The current rate environment is a significant departure from the conditions observed just a few years ago, when central bankers drastically reduced interest rates to near-zero levels and kept them there, arguably for too long.

As of September 21st, the yield on the two-year U.S. Treasury note was hovering around 5.2%, marking a 1.4 percentage point increase since May and hitting its highest point since 2006. Meanwhile, the 10-year U.S. Treasury note yield stands at a 16-year high, close to 4.5%.

The primary tool used by central banks to bring down inflation is to raise interest rates, and at the moment we continue to see ongoing economic strength and a tight labor market contributing to sustained higher inflation. Consequently, both the Fed and BoC have likely been forced into an extended period of tightening (i.e., raising rates), potentially beyond 2023, which is when many market prognosticators were calling for both the Fed and BoC to pivot and begin cutting rates not that long ago.

With a strong economy and persistent inflation, the likelihood of interest rates moving lower in the near term – and certainly not back to zero-bound levels – is minimal. In fact, rates might continue to inch upward in the coming weeks as the market continues to digest whether or not the Fed and/or BoC will implement another quarter-point rate hike before the end of the year.

Historically, looking at the U.S. bond market, 10-year yields tend to peak within a few months of the Fed's final rate hike, which it appears we’re getting very close to now. There are indications from central banks worldwide that they have either reached, or are nearing, the end of their rate hike cycles. Notably, the Bank of England's decision to maintain its target rate was unexpected and suggests a possible shift in global monetary policy. The European Central Bank and the Swiss National Bank also appear to have concluded their tightening cycles, while countries like Brazil and Poland have initiated interest rate cuts.

Looking ahead to a year from now, it wouldn’t be unthinkable to see bond yields decline from their current levels. We think investors need not obsess over timing the market precisely; the wise move is to secure current yields being offered on bank bonds and GICs, which now exceed 5% - 6% today.

 

Yields/rates are as of September, 21, 2023 and are subject to availability and change without notification. Minimum investment amounts may apply.