Hello, everyone and welcome to another week. Last week was a bit of a rollercoaster ride and our sights are now firmly fixed on the next five business days ahead; welcome to this week’s News, Views and Truths.
I am beginning to sound like a stuck record, but frankly, this can’t be helped, as the effect that bond yields are having on the broader market continues to dominate the headlines. And it seems that there is little sign of this stopping any time soon.
After a whipsawing week where correlations between bonds and equities have pretty much completely broken down, the US markets finished the trading session breaking new all-time highs, after huge rebounds due to continued concerns regarding rising bond yields.
Although the focus this week will be on the Federal Reserve and their commentary on the bond market, the likelihood is that their response will bring no respite to the under-pressure asset class. The Fed is expected to continue its party-line, of higher yields reflecting an improving economic outlook and distancing itself from the path taken by the European Central Bank, which continues on an ever-increasing bond purchasing programme.
This approach is indicative of the Fed’s comfort in yields rising as a result of their fundamental desire to increase inflation, an outcome of improving economic growth. As the US economy continues to reopen, all efforts by the Central Bank are focussed upon maximum employment levels as opposed to yield curve control.
However, this will not calm stock market nerves, with worriers concerned that a continued disorderly increase in long term yields could hamstring a recovery, especially such a highly leveraged one like the US. Significant rises above the 2% 10-year target rate would result in many companies unable to deal with significantly rising borrowing costs.
The 10-year U.S. Treasury note yield rose to around a one-year high of 1.63% at the end of the week and is up around 70 basis points from where it traded at the start of 2021.
What could be an outcome of this week’s Fed policy meeting, is the possibility of the first interest rate hike in years.
With a $1.9 trillion stimulus bill now signed into law by President Joe Biden, some senior Fed officials may choose to move their expected timeline for the first interest rate hike since the pandemic began, into 2023. But such a move still remains far away from the market’s more hawkish expectations, with short-term money markets already pencilling in a rate increase as early as the end of 2022.
And this will continue to dominate investment returns throughout the year until the market reconciles itself with this new scenario. Until then, careful portfolio allocation and construction is required to navigate these most testing of circumstances.