September 15, 2021 | By Hank Cunningham
The outlook remains challenging for fixed income investors. Fixed income securities are the most expensive asset class as nominal yields remain substantially below the rate of inflation. Of late, there has been a discernible shift in the consensus that recent inflation prints will prove to be transitory as witness the noticeable leap in labour costs. Inflation is the enemy of bonds. The higher the rate of inflation, the faster the erosion of returns for fixed income securities.
The Fed is preparing the market for the beginning of the tapering of its massive monthly bond purchase program of $120 billion. At the margin, these developments favour an upward bias to bond yields, which is more likely given the probability of even more fiscal stimulus.
It is possible that the bellwether U.S. ten-year note will reach 1.50% by year end. This modest uptick will ensure the continuation of moderate total returns for bonds.