What does the Shell-ARC deal mean for Canada's energy sector?
Tom Savage, CFA - Portfolio Manager, Arbitrage
are Oil prices the Only Force Pushing Rates Higher?
Sam Acton, CFA Portfolio Manager, Co-Head Fixed Income
Since the start of the Iran conflict, 10-year government bond yields in both the United States and Canada have climbed more than 50 basis points. The instinctive explanation has been straightforward: conflict in the Middle East, pressure on oil supply, inflation follows. But we believe there are other factors contributing to higher rates.
Yes, energy prices matter. But if the sole driver of this yield move were oil, then the moment the Strait of Hormuz reopens, rates should come screaming back down. We are not convinced that is how this plays out, and here is why:
First, growth remains strong. Earnings estimates, capital expenditures, gross domestic product forecasts, and consumer spending data are all holding in. This is not a slowing economy.
Second, the fiscal picture has deteriorated. Reduced tariff revenues in the U.S., rising defense budgets for most countries, and the prospect of energy subsidies in key regions are adding pressure to government balance sheets.
Third, labour markets remain stable. Jobless claims, non-farm payrolls, and unemployment rates have stayed resilient, giving central banks little reason to pivot aggressively toward cuts.
Fourth, inflation is surprising to the upside. Consumer price index and producer price index readings have been above expectations, and it is not just driven by energy. We’re also seeing broad-based commodity price pressure: for example copper, zinc, wheat, and beef.
Fifth, global politics deserve a closer look.Political developments in the United Kingdom and Japan, both significant bond markets, have pushed yields higher even more sharply than in North America in recent months.
The narrative that rates will reverse sharply once geopolitical tensions ease is tempting in principle. But the convergence of strong growth, deteriorating fiscal outlooks, sticky inflation, and political uncertainty suggests this rate environment may prove more durable even if oil prices decline in coming months.
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Meet Sam ActonTom Savage, CFA - Portfolio Manager, Arbitrage
Shechar Dworski, PhD, CFA – Head of Economics and Director, Macro Strategy
Jeff Bradacs, CFA – Co-Head Equity Strategies, Head of Portfolio Management & Trading
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