The North American bond markets continue to trade within fairly narrow ranges. Bond prices have been tugged higher by the following forces: a low inflation environment, a still tepid economic recovery, and strong foreign demand for U.S. treasuries. However, a lid has been placed on the bond market by a heavy calendar of Government bonds, issued to facilitate deficit financing.
Going forward, inflation and economic growth should not be a threat to bonds as the world’s central bankers will be reluctant to raise rates, fearful of dousing a fragile economic recovery.
As long as foreign interest in our domestic bond markets continues, it is probable that a positive return equal to coupon interest plus some modest price appreciation is likely
Therefore, a slightly higher than market duration is recommended.