By Tom Bradley

In Connor, Clark & Lunn Investment Management’s latest ‘Outlook’, there is an excellent rundown of why interest rates are going to stay low. The manager of our Income Fund is of the view that rates will increase, but not fast and not far from current levels.

Here is the relevant excerpt:

In terms of fixed income markets, we are still of the view that the bull market in bonds ended in the summer of 2012 and that we have entered into a somewhat benign bear phase - i.e. the rise in interest rates in the foreseeable future will be somewhat limited.

The reasons are fairly straightforward, starting with the fact that European short-term interest rates are negative and pulling down the yields on longer-term European sovereign debt. Ten-year Spanish government yields are lower than equivalent US Treasury yields and the spread between German Bunds and US Treasuries is at historically wide levels. With long-term Japanese yields around 0.5% and German Bunds below 1%, North American bond markets actually look very appealing in comparison. This will continue to attract significant capital flows into North American bonds.

In addition, a diminishing supply of bonds (due to governments cutting their deficits), continued concerns over geopolitical risks, pension fund de-risking (buying long bonds to match liabilities), and the ongoing carry-trade (where investors and banks borrow very cheap short-term funds to invest in longer-maturity, higher-yielding bonds) are additional factors helping mitigate a sharp rise in interest rates.

We are also reminded of the fact that, according to Investors Intelligence, 90% of all money managers are bearish on interest rates and expecting them to rise, while only 10% are bullish. This is causing an overcrowded trade since almost everyone has already reduced their duration, thereby limiting the potential for future selling.