Americans like to say: Go big or go home.
But after a year at home, investors have begun to worry about the potential loss of money or the misappropriation of their investments if the US government exceeds its support for the economy and causes an inflation spike.
One reason for the decline was the sharp seven-week increase in benchmark government bond yields with the 10-year Treasury TMUBMUSD10Y,
rate of 1.729% on Friday, from a one-year low of 0.51%.
“There are some general rules,” said Joe Ramos, head of US fixed income at Lazard Asset Management, about financial markets. “One of them is that the rates are bad.”
It is thought that if companies pay more to borrow, they will pass on the rising costs to consumers by raising prices for goods and services, causing households to spend more but less money. Any spending cuts could affect the recovering economy, even before it completely reopens from the deadlocks imposed to fight the coronavirus pandemic.
But Ramos also believes that some old rules for financial markets have met their due date and should be withdrawn, especially after US government Treasury yields of $ 21 trillion fell to record lows. from last year.
U.S. Treasuries have long served as a trusted asset class for institutional investors seeking protection against deflation, Ramos said, but he also called what caused Treasury output so low last year a “sign of illness.” it seemed that the world would fall on us. ”
Rising yields in today’s environment are coming as more Americans get vaccinated and Google is looking for Disney DIS,
the holiday is growing, signs of a health-saving economy, according to Ramos. “One thing I tell people is that they will be able to afford more, although it will cost more,” he said.
Powell Patience
This idea depends on the US’s ability to claim about 9.5 million jobs lost during the pandemic. Federal Reserve Chairman Jerome Powell said Friday in an opinion that he intends to support the US economy “as long as it is needed,” but also said the outlook is brightening.
Powell drew attention to the need for extraordinary measures by the central bank to strengthen financial markets amid the turmoil triggered a year ago by escalating COVID-19 cases. A year later, the United States jumped ahead of Europe and other parts of the world in terms of vaccinations, leaving Wall Street to look for clues as to what would follow.
“The big picture is that it really matters why rates go up,” said Daniel Ahn, chief economist at BNP Paribas. “It’s not just the levels, it’s the facts behind it, and the Fed has sounded pretty bloody about these larger moves because of the improved outlook on the economy.”
Ahn also pointed out that the credit spreads to LQD,
or premium investors are paid over to the Treasury to offset the risks of default on corporate debt, have not significantly exceeded, despite the rapid rise in long-term US debt yields of about two months.
US Dollar DXY,
nor did the Dow Jones Industrial Average DJIA rise sharply,
or S&P 500 SPX,
sunk into the correction territory, even if the Nasdaq Composite COMP technology
was under pressure. All three benchmarks recorded a weekly loss on Friday.
Perhaps another 70 basis point increase in the US Treasury’s 10-year yield over the next two months could be enough to trigger wider market volatility. “But I haven’t seen that yet,” Ahn said.
Related: There will be no peace until the 10-year Treasury yield reaches 2%, says the strategist
What the? Expensive credit
It has been 40 years since the US primary lending rate exceeded 20%, when former Fed Chairman Paul Volcker fought a lasting battle against runaway inflation.
Since then, generations of homeowners in the US have managed to raise 30-year mortgage rates at a fixed rate of 5% and are now closer to 3%.
“Obviously, what inflation means is different for economists and for Main Street from Wall Street,” said Nela Richardson, ADP’s chief economist, adding that people were still buying houses and taking out home loans when mortgage rates were at 18% in 1980.
“Bond investors are more confident in an economy that requires higher returns to hold relatively safe assets,” Richardson said, but added that markets tend to get nervous if higher returns mean “the end of cheap money and practically free credit ”.
Billions of dollars of congressional fiscal stimulus from the economy across the world, as more vaccinations in the US could lead to a wider reopening of business this summer, could test inflation expectations.
“Because we haven’t seen Volcker inflation, I think market participants are worried that it could unleash it,” said Brian Kloss, global loan portfolio manager at Brandywine Global.
Kloss said that “core industries, commodities and pricing companies” should do good to shareholders in an inflationary environment, but also warned that in the coming weeks after the break-up meetings. By spring, the US will have more clues about the state of the COVID-19 threat.
If the US can avoid an increase in new coronavirus cases, unlike in Europe, where additional blockages remain a threat, “it could be one of the first signs of a robust summer heading into the fall,” he said.
Meanwhile, the bond market already seems to signal that it has embraced the Fed’s commitment to maintaining accommodative monetary policy for some time, said Robert Tipp, PGIM’s chief investment strategist at Fixed Income.
He pointed to Treasury rates of return, which recently exceeded 2%, as a signal that the bond market expects inflation to rise from emergency levels, based on the rate of return, an indicator of future price pressures based on levels US Treasury Securities Inflation Trading (TIPS).
But even if 10-year rates rise to 3% and inflation rises with the Fed’s new GDP growth forecast of 6.9% for this year, Tripp expects both to return to lower family levels over the past four decades.
After the global financial crisis of 2008, people predicted “Armageddon inflation” and that “the Fed will never be able to get out of that policy” of quantitative easing, he said.
“But of course they did,” Tipp said.
Next week will bring a flood of economic data from the US. Sales of existing and new homes for February will be launched on Monday and Tuesday. Wednesday brings February durable goods orders, as well as preliminary updates to the March production and services sector index.
It’s Thursday’s weekly data on unemployment benefits and the fourth-quarter final GDP estimate, while Friday will show the latest data on personal income, consumer spending, core inflation for February and the latest reading of consumer sentiment index.