Volatility, the Fed and Opportunities in the Fixed Income Space | Mackenzie Investments

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2015 Fourth Quarter Outlook: Delivering Confidence

Monetary policy divergences and global event risks will continue to dominate the bond markets in Q4. Steve Locke, Lead of the Mackenzie Fixed Income Team, discusses a potential Fed increase and opportunities in the fixed income space. 

Volatility, the Fed and Opportunities in the Fixed Income Space

Steve Locke, Lead of the Mackenzie Fixed Income Team, shares his insights into what to expect in fixed income during the fourth quarter.

Show transcript

This summer’s market volatility is the main reason why the Fed did not raise its policy rate in September. The theme of volatility will likely be with us for the next quarter or two.  While the door is theoretically open for a potential hike by the Fed in October, volatility as well as current levels of inflation and job growth suggest there’s little cause for a raise at this time. We believe a hike is more likely in December, however that decision will be influenced week by week by the volatility of markets and global growth.

QE in Europe was rolled out earlier this year by the ECB to stimulate economic growth across the region.  Europe is currently contending with the unfortunate human migration drama, which is both a tragedy and a significant political and economic issue that will occupy the headlines in Q4.  We believe that the ECB stands ready to increase its QE program in the near term in order to foster better economic conditions in Europe.

Investment opportunities can often develop through anticipated or actual central bank policy movements.   The U.S. yield curve, for example, is higher than that of many other developed nations, as bond markets have anticipated potential Fed rate hikes, while other central banks ease.  We have been adding U.S. Treasury bonds in our Canadian portfolios, while selling Government of Canada bonds, as the yield pick-up has become larger during Q3.

The Bank of Canada did not ease in August, contrary to popular opinion we feel they are likely to ease again in Q4 in an effort to weaken the Canadian dollar to stimulate export focused parts of our economy like manufacturing.

Please read our full outlook and learn how these developments and a potential Bank of Canada interest rate cut may impact the Canadian and Global economies.

Key Points

  • Although the door is open to a potential Fed rate hike in October, it is more likely to occur in December.
  • The Euopean Central Bank (ECB) stands ready to increase its Quantitative Easing (QE) program in the near term in order to foster better economic conditions.
  • The Bank of Canada will likely ease again in Q4 to stimulate export-focused parts of our economy, like manufacturing.

For more of the fourth quarter outlook, please read the October issue of Express.

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