Market updates from February

Over the last month, and particularly the last couple of weeks, it’s all been about rising bond yields. Since the beginning of the year, investors have become more confident in an economic recovery as we gradually look to move on from the global pandemic. This has been helped by increasingly positive signs from the vaccine rollouts. There have also been signs that economic activity has been less impacted by restrictions this time around and we’ve been seeing this through some improved economic data.

Policy support from both central banks and governments for the time being is unwavering, particularly as the significant fiscal stimulation from a Biden-led US has come closer to fruition. This has all added fuel to the reflation-trade fire. Over February, the bond market has been the focal point for this. US 10year Treasury Yields nudged up above 1.5% in some of the last few trading sessions of the month, before dropping back to 1.4% at the end of February and having been 1.1% at the start of the month. These upward moves were reflected around the globe and thus sovereign bonds posted negative returns again this month.

These dramatic shifts reverberated through capital markets. Credit risk provided some protection but only enough to offset the price falls in the lower duration and higher yielding parts of the market. In general, equities were still able to eke out small positive gains but not without some volatility along the way. It was largely the previous beneficiaries of lower rates, such as large cap US Tech growth stocks, that were hit the hardest as investors sold down these types of stocks, preferring again the more beaten-up areas of the markets such as cyclicals, small caps and value.

These market moves are reflective of an increase in both inflation and growth expectations, and indeed, real yields have moved up sharply pushing the headline nominal rates upwards. Our expectations of inflation are that there is a long way to go before it becomes a problem, and indeed central banks have been vocal about letting inflation run a little higher. We’re of the view that a Fed rate rise before year end is unlikely as things stand today and we’d expect to see central bank rhetoric over the coming weeks to lean even harder against the prospect of any potential tightening. The rise in yields highlights a stronger economy, which in turn should be reflected in growth assets. Although it makes sense that this plays out in different ways in different parts of the market and large cap US Tech growth stocks are due a breather. Perhaps once central banks start to embrace thoughts of tightening, concerns over bond yield rises may become more of an issue.

Important information:

The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation.