Americans like to say: Go big or go home.
But after a year of staying at home, investors began to worry about losing money or being caught up in their investments if the U.S. government exceeds the support limit for the economy and causes an inflationary hangover.
One reason for the shudder was the strong seven-week rise in yields on government bonds of reference, with the 10-year Treasury TMUBMUSD10Y,
rate of 1.729% Friday, from a year-ago low of 0.51%.
“There are certain ground rules,” said Joe Ramos, head of fixed income at Lazard Asset Management, on the financial markets. “One is that the rate hike is bad.”
The thought is that if companies pay more to borrow, they will pass on rising costs to consumers, raising prices for goods and services, causing households to spend more, but getting less return on their investment. Any retreat on the part of spenders could hamper the recovery of the economy, even before it fully reopens after the blocks imposed to combat the coronavirus pandemic.
But Ramos also thinks that some old rules for financial markets have matured and should be withdrawn, especially after yields on the US government’s $ 21 trillion Treasury market fell to record levels last year.
The US Treasury has long served as a reliable asset class for institutional investors seeking protection from deflation, Ramos said, but he also called what brought Treasury yields so low last year a “sign of illness” “when” it looked like the world was going to fall apart on us. ”
Increasing yields in the current environment occur as more Americans are vaccinated and Google searches for Disney DIS,
vacations soar, signs of economic recovery, according to Ramos. “One thing I tell people is that they can pay more, even though it costs more,” he said.
Powell Solitaire
That idea depends on the United States’ ability to recover about 9.5 million jobs lost during the pandemic. Federal Reserve Chairman Jerome Powell said on Friday in an article that he plans to support the US economy “for as long as it takes”, but also said that the outlook is improving.
Powell drew attention to the need for extraordinary measures by the central bank to support financial markets amid the turmoil unleashed a year ago with the increase in COVID-19 cases. A year later, the United States jumped ahead of Europe and other parts of the world in terms of vaccination, leaving Wall Street looking for clues as to what lies ahead.
“The big picture is that it really matters why rates are going up,” said Daniel Ahn, chief economist at BNP Paribas for the United States. “It is not just the levels, but the facts behind it, and the Fed has seemed very optimistic about these bullish movements, because of the improvement in the outlook for the economy.”
Ahn also pointed out that credit spreads LQD,
or premium investors are paid above Treasury bills to offset the risks of default on corporate debt, they have not had a significant gap, despite the rapid increase in long-term debt yields in the US in about two months.
The US dollar DXY,
neither did it rise dramatically, nor did the Dow Jones Industrial Average DJIA,
or S&P 500 SPX,
sank in the patch territory, although the high-tech Nasdaq Composite COMP,
has been under pressure. All three benchmarks recorded a weekly loss on Friday.
Perhaps another increase of 70 basis points in the 10-year US Treasury benchmark yield over the next two months may be enough to trigger broader market volatility. “But we haven’t seen that yet,” said Ahn.
Related: There will be no peace ‘until the 10-year Treasury yield reaches 2%, says the strategist
What? Expensive Credit
It has been 40 years since the main US lending rate exceeded 20%, when former Fed chairman Paul Volcker fought a lasting battle against rampant inflation.
Since then, generations of homeowners in the United States have been able to grab 30-year fixed-rate mortgage rates at 5% and are now close to 3%.
“Obviously, what inflation means differs for Wall Street savers and Main Street,” said Nela Richardson, chief economist at ADP, adding that people still bought and borrowed when mortgage rates were 18% in the 1980s. 1980.
“Bond investors are more confident in an economy that requires higher yields to keep assets relatively safe,” said Richardson, but added that markets tend to be agitated if higher yields end up meaning “the end of cheap money and credit. virtually free ”.
Trillions of dollars in Congressional pandemic fiscal stimuli that roam the economy, in the same way that more vaccinations in the United States could lead to a broader reopening of companies this summer, could put inflation expectations to the test.
“Since we have not seen inflation since Volcker, I think market participants are concerned that it could trigger this,” said Brian Kloss, global credit portfolio manager at Brandywine Global.
Kloss said that “basic industries, commodities and companies that have pricing power” should perform well for shareholders in an inflationary environment, but also warned that in the coming weeks, after the spring break, the United States will have more clues about the COVID-19 threat status.
If the United States can prevent an increase in new coronavirus cases, unlike in Europe, where new blockages remain a threat, “it could be one of the first signs of a robust summer, heading into autumn,” he said.
Meanwhile, the bond market appears to be already signaling that it has embraced the Fed’s commitment to maintain accommodative monetary policy for some time, said Robert Tipp, chief investment strategist at PGIM Fixed Income.
He pointed to the Treasury’s equilibrium rates, which recently reached 2%, as a sign that the bond market expects inflation to rise from emergency levels, based on break-even points, an indicator of future price pressures with based on US Treasury inflation trading levels. protected titles (TIPS).
But even if 10-year rates return to 3% and inflation rises along with the Fed’s new 6.9% GDP growth forecast for this year, Tripp expects both to fall back to the lowest family levels in recent years. four decades.
After the 2008 global financial crisis, people predicted an “Armageddon of inflation” and that “the Fed would never be able to get out of that policy” of quantitative easing, he said.
“But of course it is,” said Tipp.
Next week, there will be a deluge of US economic data. Monday and Tuesday will see the launch of sales of new and existing homes for February. Wednesday brings February orders for durable goods, as well as preliminary updates to the March manufacturing and services sector index.
There are weekly unemployment benefit claims data on Thursday and the final GDP estimate for the fourth quarter, while Friday will show the most recent data on personal income, consumer spending, February core inflation and the latest reading of the consumer sentiment index.