Positive momentum builds in bond markets

Additional rate cuts by the Bank of Canada, as well as strong technical and fundamental factors, have been driving bond market performance this year, says Gino Di Censo, director, global fixed income at CIBC Asset Management. 

In a Sept. 10 interview, Di Censo said he’s expecting the Bank of Canada to cut rates by 50 basis points, and the Federal Reserve to cut by 100 basis points over the next 12 months. These cuts should be supportive for bond market performance, he said.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

He expected inflation to remain elevated, but close to the Bank of Canada’s target. “I think this, coupled with a weakening economy, should give [the] central bank leeway to cut rates to support the potential deteriorating economic conditions,” Di Censo said.

From a technical standpoint, he said the supply of new issuance in the credit markets hasn’t kept pace with demand, which has helped support prices.

“On the fundamental side, fundamentals have been constructive and been fairly resilient,” he said.

Another factor leading to positive bond market performance is healthy earnings forecasts for underlying companies, Di Censo said.

“Valuations, with respect to corporate bonds, have [been] and remain very rich,” he said. “This has been supported by technical and fundamentals. Should the fundamentals or technicals start to deteriorate in the bond market, this will put pressure on bond prices. And we don’t think the risks seem to be fully appreciated by the markets at this time.”

Di Censo also cautioned that macroeconomic uncertainty and political instability in major economies, like Europe, could fuel volatility.

“We do expect potentially a bit more volatility on the global bond market if political instability continues,” he said.

Di Censo said high-quality bonds remain attractive, and provide solid income without undue credit risk. He also likes corporate hybrids over high-yield bonds.

“You’re getting yield pick up for less credit risk,” he said. “Of course, we do have high-yield exposure in the fixed-income funds that allow for it.”

Di Censo has a defensive stance with duration slightly longer this quarter versus the previous quarter. “This is really in anticipation of seeing lower yields, partially attributed to some fear surrounding tariffs in the market and market pricing in additional rate cuts,” he said.

Overall, Di Censo’s outlook is constructive. “We think the spreads and valuations are certainly rich, but we, as mentioned, see positive fundamentals and technicals, which we believe are going to be supportive of bond markets going forward.”

He said that he’s continuing to keep an eye on the macroeconomic risks in the portfolios, but “bonds continue to be a key ballast in the portfolio and [we] believe they will remain a core part of [a] traditional 60-40 portfolio.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.