Is the Bond Market Getting Ahead of Itself?

True, financial markets are forward-looking, but we believe that the answer to the above question is yes. In our opinion, the bond market is currently overlooking the lasting impact that risks such as a slow vaccine rollout and the spread of new COVID variants could have on the overall economy. Moreover, the economic recovery is mostly contingent upon the governments’ ability to pass timely stimulus bills, which have the history of experiencing delays. For instance, Canadian airlines are still waiting on a muchneeded aid package from Ottawa. Treasury Secretary Janet Yellen even warned that “if we don’t provide additional support, the unemployment rate (in the U.S.) is going to stay elevated for years to come.” Regarding inflation, we believe that while the Federal Reserve’s framework now allows inflation to overshoot its target of 2%, deflationary factors such as the globalization, lower tariff risks under President Joe Biden, and increased productivity are also at play, limiting the potential upside for prices.

Thus, as a lot of good news is now priced-in by the market, we decided to lengthen our duration; buying long-term bonds to protect against potential short-term shocks.