Inflation

You may have seen headlines highlighting that the 10-year Treasury now yields above 1%. It's an amazing state of our current economic situation where that a headline actually gathers any attention. Rates are still incredibly low, and we expect them to remain low for the foreseeable future.

We believe that inflation will be muted as the pandemic economic challenges will linger as vaccine distribution is slowly rolled out. There are still many unemployed workers in the United States and global demand for US products has been impacted because of Covid concerns.

While energy prices have risen lately because of slowing production, we believe there remains significant pressure on global economies whereby energy costs will be kept in check by sluggish demand. Additionally, alternative energy continues to be a bigger part of the energy discussion and there's no sign of that slowing down in the near future. 

According to recent inflation data compiled by Statista, inflation data remains muted which will likely mean interest rates will remain low. This applies to fixed income yields as well as the cost of borrowing.

Monthly 12-month inflation rate in the United States from November 2019 to November 2020 

Source: https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/ 

In a recent CBC article, Kevin Nicholson of RiverFront Investment Group was interviewed regarding his outlook on inflation. With regards to 2021 inflation, he is in agreement with our perspective. In that article he stated:

.......“It comes down to this year’s challenged jobs market.  ‘We need to see employment pick up, and we need to see wages rise,’ Nicholson said.  ‘Once we get wages rising, then we will create more demand with that discretionary income. So for now, we don’t see inflation being a problem in 2021 especially because we still have lockdowns going on periodically throughout the country.’ ”.......

Source: 
https://www.cnbc.com/2021/01/12/inflation-comeback-worries-are-premature-7point9-billion-money-manager.html 

Our projection is the 10-year Treasury will likely trade in a range between ¾ of a percent and 1 ½ percent in calendar year 2021. Fixed income assets will still provide some measure of safety as a store of value contrasting with significant fluctuations in the stock market. Yield will provide some return, but fixed income will be in place to reduce volatility in portfolio strategies. 

While we expect yields to be low throughout 2021, 2022 may be a different story.  We will be monitoring conditions and making adjustments as needed based on new data.