Americans like to say, go big or go home.
But after a year of staying home, investors have begun to worry about losing money or staying bad in their investments, if the U.S. government exceeds its support for the economy and causes a hangover from inflation.
One of the reasons for the reduction has been the sharp seven-week rise in benchmark bond yields, with the TMUBMUSD10Y three years away from the Treasury,
Friday’s rate at 1.729%, from a low of 0.51% a year ago.
“There are certain general rules,” Joe Ramos, head of U.S. fixed income at Lazard Asset Management, said about financial markets. “One is raising rates are bad.”
It is thought that if companies pay more to borrow, they will result in increased costs for consumers by raising prices on goods and services, causing families to spend more but receive less money. Any setback from investors could hurt the recovering economy, even before it completely reopens the blockades imposed to fight the coronavirus pandemic.
But Ramos also believes some old rules for financial markets have met their due date and should be withdrawn, especially after U.S. government Treasury market yields of $ 21 trillion fell to record lows. ‘last year.
U.S. treasuries have long served as a reliable asset class for institutional investors seeking protection from deflation, Ramos said, but he also described as a sign of illness what caused such low yields. Treasure last year, when it seemed like the world was falling on us. ”
Growing returns in today’s environment occur as more Americans get vaccinated and Google searches Disney DIS,
holidays are on the rise, signs of an economy returning to health, according to Ramos. “One thing I tell people is that they will be able to pay more, even though it will cost more,” he said.
Powell Patience
This idea depends on the ability of the U.S. to recover some 9.5 million jobs lost during the pandemic. Federal Reserve Chairman Jerome Powell said Friday in an opinion that he plans to support the U.S. economy “for as long as it takes,” but also said the outlook has been brighter.
Powell drew attention to the need for extraordinary steps by the central bank to strengthen financial markets amid the turmoil unleashed a year ago in escalating COVID-19 cases. A year later, the United States has advanced in Europe and other parts of the world in terms of vaccines, leaving Wall Street looking for clues as to what will come next.
“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 higher moves, due to the improving outlook for the economy.”
Ahn also noted that credits differentiate LQD,
or, premium investors are paid above Treasury to offset the risks of corporate debt default, but they have not opened significantly, despite the rapid rise in long-term U.S. debt yields for about two months.
The US dollar DXY,
nor has it shot sharply, nor has the Dow Jones Industrial Average DJIA,
or S&P 500 SPX,
sunk into correction territory, though the Nasdaq Composite COMP
has been under pressure. The three benchmarks recorded a weekly loss on Friday.
Perhaps another 70 basis point rise in U.S. Treasury yields to ten years over the next two months could be enough to trigger broader market volatility. “But we haven’t seen it yet,” Ahn said.
Related: There will be no ‘peace’ until the 10-year Treasury yield reaches 2%, the strategist says
What? Expensive credit
It’s been 40 years since the U.S. mainstream credit rate surpassed 20%, when former Fed Chairman Paul Volcker waged a lasting battle against runaway inflation.
Since then, generations of U.S. homeowners have been able to raise 30-year fixed-rate mortgage rates to 5% and are now closer to 3%.
“Obviously, what inflation means differs for savers and for Main Street Wall Street,” said Nela Richardson, chief economist at ADP, adding that people were still buying houses and taking out home loans when rates mortgages were 18% in the 1980s.
“Bond investors have more confidence in an economy that requires higher returns to keep assets relatively safe,” Richardson said, but added that markets tend to get nervous if higher returns end up meaning “the end of the cheap money and virtually free credit “.
Billions of congressional fiscal stimulus to Congress as they traverse the economy, just as more vaccinations in the United States could lead to a wider reopening of businesses this summer, could test expectations of inflation.
“Since we haven’t seen inflation since Volcker, I think market participants are concerned that this could trigger it,” said Brian Kloss, global credit portfolio manager at Brandywine Global.
Kloss said “commodities, commodities and companies with pricing power” should do good to shareholders in an inflationary environment, but also warned that in the coming weeks, after the spring break meetings , that the US will have more clues about the state of the COVID-19 threat.
If the United States can prevent a rebound in new coronavirus cases, unlike in Europe, where blockages remain a threat, “it could be one of the first signs of a robust summer, toward fall,” he said. .
Meanwhile, it appears that the bond market is already indicating that it has made a commitment to the Fed to maintain accommodative monetary policy for some time, said Robert Tipp, chief investment strategist at PGIM Fixed Income.
He noted Treasury equilibrium rates that recently exceeded 2% as a signal that the bond market expects inflation to rise from emergency levels, based on yields, an indicator of future price pressures based on US Treasury inflation trading levels. protected values (TIPS).
But even if ten-year rates rise to 3% and inflation rises along with the Fed’s new GDP growth forecast of 6.9% for this year, Tripp expects both to fall back to lowest levels known in the last four decades.
After the 2008 global financial crisis, people predicted “Armageddon of inflation” and that the “Fed could never get out of this policy” of quantitative easing, he said.
“But of course they did,” Tipp said.
A flood of US economic data will occur next week. New and existing home sales for February will be released on Monday and Tuesday. On February, durable goods orders for February are presented, as well as preliminary updates to the March manufacturing and services index.
These are weekly data on unemployment benefit claims on Thursday and the final estimate of fourth-quarter GDP, while on Friday they will show the latest data on personal income, consumer spending, February core inflation and reading most recent consumer sentiment index.