As governments around the world look to increase defence and infrastructure spending, fixed income markets are being strained by the growing supply of bonds, according to one expert.
“In Canada… we’ve seen just recently some announcements that there will be a meaningful increase in government spending coming towards military expenditures,” Konstantin Boehmer, portfolio manager at Mackenzie Investments, told BNN Bloomberg in a Monday interview.
“That is putting some strain on the bond market because that is crowding out investors. There’s just a lot of supply of bonds coming our way in the fixed income market and that is leading in general to slightly higher yields.”
In the U.S., fixed income investors have been focused on U.S. President Donald Trump’s piece of fiscal spending legislation he calls the “Big Beautiful Bill,” which could add significantly to the national debt.
But Boehmer said the impact of the bill on bond investors may be less severe than many experts believe.
“I think the ‘Big Beautiful Bill,’ as terrible as the name is, is actually not as bad as it is portrayed in the media, because for all intents and purposes the tax cuts from Trump 1.0 had to get extended and that alone is roughly US$5 trillion,” he said.
“But the package in itself actually ended up being maybe $2-$3 trillion in size, so a little bit less than that, so there had to be some areas where actually some savings are being put in. And if we add the revenue that is expected from tariffs, this is actually a broadly neutral tax bill.”
Boehmer said the realization that the Republican spending bill won’t add as much to the U.S. national debt as previously feared is “little-by-little, sinking into the market,” easing some of the volatility that had been seen in recent weeks.
He added that despite an ongoing rebalancing away from U.S. assets by investors looking for more stable fixed income markets, yields from 30-year inflation-linked Treasury bonds currently sit at around 2.7 per cent, which compares “favourably” to most other countries.
The few exceptions would be in certain emerging markets, where a weakening U.S. dollar has made bond investing more attractive, Boehmer said.
“That should be pretty much the best-case scenario for emerging markets and Brazil would be probably at the forefront of that,” he explained.
“The reason why that is good for emerging markets is typically they borrow a lot of money in U.S. dollars. If the value of the U.S. dollar goes down, that means they have to pay less to pay back those debt levels, so that is good for emerging markets.”
Fixed-income investors will also be watching for the U.S. Federal Reserve’s next rate decision scheduled for later this week. The central bank is widely expected to hold rates steady, though Boehmer noted that the U.S. labour market continues to show signs of weakness.
U.S. jobs data in the form of initial jobless claims have been “weakening in recent weeks,” he said, which could eventually force the Fed to step off the sidelines.
“Certainly not for this time,” he said, “but if we get a few more bad reports, I think the next Fed meeting could be in play.”
