Although the rise in bond yields has been talked about in the financial markets over the past two weeks, there is something different about the way government debt is responding to signs of a picking up economy.
According to the BlackRock Investment Institute, a 1% rise in 10-year break-even US inflation – a measure of market inflation expectations – has typically led to a 0.9% rise in 10-year government bond yields since 1998 But since March 2020 Break-even inflation has risen 1.2% and nominal interest rates have risen only 0.5%.
“We expect an improving economy, a massive fiscal boost and rising inflation to push up nominal interest rates further this year, albeit by less than in comparable periods in the past. We expect central banks to lean against market concerns about rising debt and keep interest rates low for the time being, ”said the strategists of the world’s largest fund manager.
On Monday, European Central Bank President Christine Lagarde said the central bank is closely monitoring bond yields, while Federal Reserve Chairman Jerome Powell told the Senate Committee on Banks on Tuesday that the rise in bond yields “is in some way. sentence was a statement of confidence. “That there will be a robust and full economic recovery.
The BlackRock strategists compared US retail sales to past recessions. “The different nature of the COVID shock means that activity has resumed much faster than in previous business cycle recessions – and implies unusually high growth rates as a vaccine-led reopening unfolds,” they said.
BlackRock offers insights on both a strategic long-term vision and a tactical vision at 6-12 months. But for both equities and government bonds, they changed both their strategic and tactical views to the same extent, citing the introduction of the COVID-19 vaccine and the US fiscal stimulus. BlackRock said it is underweight government bonds “because their ability to act as ballasts on the portfolio diminishes with returns near lower limits and rising debt levels could ultimately pose risks to the low interest regime.”
BlackRock was overweight in stocks. “We see a better earnings outlook with moderate valuations. Incorporating climate change into our expected returns will increase the appeal of developed market equities, given the large weights of sectors such as technology and healthcare in reference indices, ”he said.
By region, BlackRock has an overweight position in the US due to its exposure to technology and healthcare, while US small caps are targeting a cyclical rebound. BlackRock has moved neutral from an underweight position in European equities as there is room to close the valuation gap as the economic reboot becomes more entrenched.
The buzz
Powell will present his low interest story to the House Financial Services Committee, while two key officials, Governor Lael Brainard and Vice President Richard Clarida, will deliver speeches. The US economic calendar also includes new home sales, while Germany reported a stronger-than-expected increase in gross domestic product in the fourth quarter.
According to Japanese newspaper Nikkei, President Joe Biden will sign an executive order to work with Taiwan, Japan, South Korea and Australia to build supply chains for semiconductors, electric vehicle batteries and rare earth metals. The Washington Post reported that Biden will sign the order on Wednesday.
Cathie Wood’s ARK Invest Funds Added $ 168 Million to Tesla TSLA,
shares on Tuesday, after the electric vehicle manufacturer closed below $ 700, according to its website.
Payment service Square SQ,
fell 4% after it announced a new $ 170 million investment in bitcoin BTCUSD,
because it exceeded the fourth-quarter earnings estimate on slightly better-than-expected sales.
PRA Health Sciences PRAH,
Up 25% in premarket trading after Icon ICLR agreed to buy,
in a $ 12 billion cash and stock deal.
Shares of Bausch Health Companies BHC,
rose to a five-year high in premarket trading on Wednesday, after the pharmaceutical and medical devices company said it reached an agreement with billionaire activist investor Carl Icahn and will add two of its nominees to its board of directors .
GameStop GME,
the video game salesman announced that his chief financial officer would be stepping down. Forbes reported that the board lost faith in Jim Bell’s ability to focus on e-commerce. Related, Robinhood Co-Chief Executive Vlad Tenev defended the way his company handled the GameStop saga in an interview with Barstool Sports founder Dave Portnoy.
The markets
US Equity Futures ES00,
NQ00,
were higher on Wednesday. On Tuesday, the S&P has 500 SPX,
finished higher after five consecutive losses.
The return on the 10-year Treasury TMUBMUSD10Y,
rose to 1.37%. Hong Kong shares HSI,
declined after the government announced it would increase stamp duty on stock trading.
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