7 new year predictions for fixed income investors

Aubrey discusses his take on the economy and its potential impact on bond markets in 2018.

We reflected on fixed income markets in 2017, including some key learnings, in my last blog post. Putting on our forward-looking goggles now, here are the main features of an evolving fixed income landscape as investors start the new year.

  1. Our signals continue to point to synchronized, above-trend global growth.
  2. Rates are poised to rise modestly in Canada over the year, beginning with the central bank’s Jan. 23 announcement. We expect, however, only one more hike (at most) through the rest of 2018.
  3. After all, it is still a low-return world. We see broad domestic exposures, like the FTSE TMX Canada Universe Bond Index delivering low single-digit returns on average over the next 10 years.
  4. Credit spreads can continue to narrow (supported by U.S. tax reform, which might result in more limited high yield and investment grade supply), but we don’t anticipate a repeat of the Great Narrowing of 2017. Given the relative position we’re at now, we can’t expect another double-digit compression in basis points.
  5. Inflation is poised to rise, but modestly.
  6. Volatility will likely continue to exhibit two states: low for the most part, but interrupted with intermittent spikes. (One reason we believe an active strategy that can respond to those spikes may help benefit investors.)
  7. A flat (or flatter) yield curve is likely to persist.

That last expectation raises one last point: a flattening yield curve is not necessarily a precursor to a recession, and there is nothing imminently pointing to one at the moment. Yet markets are unpredictable by nature, and so are the fat-tail risk events that could send them into a head-spin.

Ultimately, we believe the learnings from last year will also apply for the year ahead: active management is important for seeking above-market returns in this environment and increasing the breadth of a portfolio through global exposures can help enhance returns, simply by providing another opportunity set to exploit.

Aubrey Basdeo is a Managing Director and Head of Canadian Fixed Income for BlackRock. He is a regular contributor to The Blog in Canada.

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