Portfolio Perspective: Fixed Income

Fixed income portfolio allocations continue to evolve under the neutral rate policy of the Bank of Canada (BoC). This approach is to maintain an interest policy rate consistent with full employment, trend growth and stable prices. It is an important concept in order to understand how your fixed income portfolio will be impacted looking forward.

We expect monetary normalization to proceed slowly. It will take an accumulation of good news to prompt policy action. In this regard, the strong headwinds felt by the economy in early Q1, with GDP reported to have contracted 0.1% in January, have left the central bank with room for patience. The BoC now has the luxury of waiting to see how the housing market performs in May and June before updating its economic projections for the July 11 Monetary Policy Report. By then we expect that evidence of a pickup in growth will be widespread enough to prompt a rate hike. We continue to see the overnight rate ending 2018 at 1.75%.

Enjoy the fulsome review from our partners at National Bank Financial Here.

Portfolio Perspective

As interest rates rise in a very managed way, our partners at National Bank Financial (NBF) Economics offer a portfolio perspective. What are the impacts of a strong economy amid trade wars and geopolitical shuffling? Recall that Canada, as well as other trading partners have experienced an exceptionally low interest rate environment since 2008.

How do the Central Banks tread water to control inflation, yet facilitate growth? The neutral rate is the policy rate consistent with full employment, trend growth and stable prices. It is an important concept, yet the Bank of Canada (BoC) is having a difficult time defining the range for the future bank rate. NBF Economics expect monetary normalization to proceed slowly. It will take an accumulation of good news to prompt policy action. In this regard, the strong headwinds felt by the economy in early Q1, with GDP reported to have contracted 0.1% in January, have left the central bank with room for patience.

Where is the Bank Rate Going?

While financial markets are giving 31% odds of the Canadian overnight rate reaching at least 2.0% (three more BoC rate hikes) in 2018, the fed funds futures market gives 80% odds of the effective fed funds rate trading at or above 2.125% by year end. Consider that NBF expects that 10-year BoC bonds will be at 2.63% by the end of 2018. What does this mean for your portfolio? Enjoy the Fixed Income Monitor from National Bank Financial for a fulsome discussion on interest rate trends here.

https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/monthly-fixed-income-monitor.pdf