US yields continued to rise abruptly with the pace taking markets by surprise, we have come a long way rather quickly and are maybe due a pause.
The inflation debate is ongoing and there is justifiable optimism that we are beginning to see the end of the pandemic here and in the US but globally we are not quite out of the woods. As the US Treasury curve sharply bear steepened, the Long Bond reaching a yield of more than 2.5%, the effect on other long duration assets became material as discounting of future cash flows by a higher risk free rate affected growth and tech substantially. In several appearances, Fed officials have not sought to mitigate these moves sticking to their narrative, possibly because they were already concerned about the potential for asset bubbles. In a recent appearance, Jay Powell raised growth forecasts, reiterating they were prepared to let the economy run hot with above target inflation, rates would not be hiked any time soon and asset purchases would be maintained. Add on fiscal measures in the form of Biden’s successful clinching of a full $1.9 trillion stimulus package to be followed by apparently a similar sized infrastructure splurge, the liquidity tap remains fully open. As most asset classes regained pre pandemic levels, it was rates markets that had not played catch up, now the 10-year yield finally exceeds the yield on the S&P. Powell was strangely silent recently on the imminent end of the Supplementary Leverage Ratio exemption for banks which is due to expire at the end of March (which allowed for banks to not account for US treasuries on their balance sheets). This has probably contributed to selling pressure forcing up yields.
EU yields have moved but not to the same extent, remaining deeply negative and solely dependent on anchoring from the ECB. Lagarde remains a loose cannon in how she chooses her words to address the market but her sometimes slightly untactful approach is no worse than the shambolic attempts to implement a vaccination programme by Brussels bureaucrats.
No change from the Bank of England but the Gilt curve has also seen its fair share of readjustment and bear steepening with the 30-year nearly doubling, moving to a mighty 1.4%; this might not seem excessive but it is down 16% in price terms. Amidst all of the rate volatility, the prospects for (potentially outsized) growth, bounce backs in activity and general health of corporate balance sheets means that credit spreads have hardly moved with the iTraxx Main IG index trading where it started the year. Sterling spreads are a touch wider but nothing significant. The primary market remains firmly open for issuers of any description, as a recent dual tranche by pandemic flattened IAG, printing 8-year HY risk at 3.75%, would attest.