Americans like to say: go big, or go home.
But after a year of staying home, investors began to worry about the possible loss of money, or getting their feet wrong in their investments, if the US government exceeded its support for the economy and caused an inflationary catastrophe.
One of the reasons for the collapse was the sharp, seven-week upswing in government bond yields, with the ten-year treasury TMUBMUSD10Y,
rate at 1,729% Friday, from a low a year ago of 0.51%.
“There are certain rules,” said Joe Ramos, head of U.S. fixed income at Lazard Asset Management, on financial markets. “One is that rising rates are bad.”
The thinking is that as companies pay more to borrow, the rising costs are passed on to consumers by pushing up prices on goods and services, causing households to spend more but earn less money for their money. Any withdrawal by drivers could jeopardize the recovery of the economy, even before it is reopened due to the blockade put in place to combat the coronavirus pandemic.
But Ramos also believes that some old rules for financial markets have met their expiration date and that they should retire, especially after returns in the US treasury market fell from $ 21 billion to last year’s record low.
U.S. treasurers have long served as a reliable asset class for institutional investors seeking protection against deflation, Ramos said, but he also mentions what drove treasury yields so low last year, a ‘sign of illness’, when it’ seemed like the world was going to fall on us apart. ”
Rising returns in the current environment come as more Americans are vaccinated and Google searches for Disney DIS,
holidays are rising, according to Ramos, signs of an economy recovering. “One thing I tell people is that they will be able to afford more, even if it costs more,” he said.
Powell Patience
This idea depends on the ability of the US to reclaim about 9.5 million jobs lost during the pandemic. Federal Reserve Chairman Jerome Powell said in an opinion on Friday that he intends to support the U.S. economy “as long as it lasts,” but also said the outlook has brightened.
Powell drew attention to the need for the central bank’s extraordinary steps to tighten financial markets amid the unrest unleashed a year ago by climbing COVID-19 cases. A year later, the US jumped ahead of Europe and other parts of the world in terms of vaccinations, leaving Wall Street looking for clues as to what was to come.
“The whole picture is that it really matters why rates are rising,” said Daniel Ahn, chief economist at US BNP Paribas. “It’s not just the levels, but also the facts behind them, and the Fed sounds rather appalling about these movements being higher due to the improved outlook for the economy.”
Ahn also pointed out that credit spread LQD,
or if premium investors are paid above the treasury to offset the standard risks on corporate debt, they have not cracked significantly, despite the rapid rise in U.S. long-term debt yields over about two months.
The US dollar DXY,
did not shoot up sharply either, nor did the Dow Jones Industrial Average DJIA,
or S&P 500 SPX,
sunk into the correction area, even though the technology-heavy Nasdaq Composite COMP,
was under pressure. All three benchmarks discussed a weekly loss on Friday.
Perhaps another 70 basis point increase in the standard yield for ten years in the US Treasury over the next two months is enough to bring about broader market volatility. “But we have not seen it yet,” Ahn said.
Related: There will be no peace until the ten-year yield reaches 2%, says the strategist
What? Expensive credit
It was forty years ago that the primary US lending rate exceeded 20%, when Paul Fed, former chairman of the Fed, waged a lasting fight against runaway inflation.
Since then, generations of American homeowners have been able to raise the thirty-year mortgage interest rate to 30%, and it is now closer to 3%.
“What inflation means, of course, differs for savers and Main Street from Wall Street,” said Nela Richardson, chief economist at ADP, adding that people were still buying houses and taking out home loans when interest rates hit 18% in the 1980s.
“Bond investors are more confident in an economy that requires higher returns to own relatively safe assets,” Richardson said, but added that markets tend to get creepy if higher returns end up being “the end of cheap money and virtually free”. credit “means.
Trillions of dollars in fiscal stimulus from Congress moving through the economy, just as more U.S. vaccinations could potentially lead to a broader business reopening this summer could put inflation expectations to the test.
“Because we have not seen inflation since Volcker, I think market participants are worried that it could unleash it,” said Brian Kloss, Brandywine Global’s global credit portfolio manager.
Kloss said “basic industries, commodities and pricing companies” should do good for shareholders in an inflationary environment, but he also warned that the US would have more clues in the coming weeks, after the spring meetings, about the status of the COVID-19 threat.
If the US can avoid an increase in new cases of coronavirus, unlike Europe where further blockages are a threat, it could be ‘one of the first signs of a strong summer going into the autumn,’ he said .
Meanwhile, it appears that the bond market has already indicated that it has seized on the Fed’s commitment to keep monetary policy accommodating for some time to come, said Robert Tipp, chief investment officer of PGIM Fixed Income.
He pointed to the Treasury’s break-even rates, which had recently risen above 2%, as a sign that the bond market expects inflation to rise from emergency levels, based on equities, an indication of future price pressures based on US Treasury trading levels. -inflation. protected securities (TIPS).
But even as 10-year rates rise to 3% and inflation rises with the Fed’s new 6.9% GDP growth forecast for this year, Tripp expects both to fall back to the lower levels known over the past four decades. wash.
After the global financial crisis in 2008, people predicted that “inflation was Armageddon” and that the “Fed would never be able to get out of that policy” of quantitative easing, he said.
“But of course they did,” Tipp said.
Next week there will be an avalanche of US data. On Monday and Tuesday, sales of existing and new homes for February will be launched. Wednesday presents durable goods orders in February, as well as preliminary index updates for the manufacturing and services sectors in March.
This is weekly data on unemployment benefits on Thursday and the final estimate of GDP in the fourth quarter, while Friday will show the latest data on personal income, consumer spending, core inflation for February and the latest index reading of consumer sentiment.