U.S. Fixed Income

February 2021 Fixed Income Market Update

In our view, January may prove to be a microcosm of the new year.
February 2021

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News & nuggets

Virus and vaccine

The U.S. continues to administer approximately one million vaccines a day, raising hopes for a return to normalcy. However, reports of new strains of COVID in South Africa and Brazil have prompted concerns that the crisis will continue.

Citing improved coronavirus data, California, New York and other states and municipalities have lifted or reduced restrictions on restaurants and other businesses. The reduced restrictions should contribute to rebounding economic activities.

Monetary policy

Acknowledging “the path of the economy will depend significantly on the course of the virus, including progress on vaccinations”, the Federal Open Market Committee left rates and its asset purchase plan unchanged at the January 26-27 meeting. No change was expected and Chairman Powell noted “the economy is a long way from our monetary policy and inflation goals, and it’s likely to take some time for substantial further progress to be achieved.”

As economic data has generally improved and rates rose in January, some had begun to argue the Fed would be forced to change policy more quickly than indicated. Several Fed officials have cautioned patience and Chairman Powell reminded markets that policy will be “highly accommodative as the recovery progresses.” Powell addressed prospective changes in policy directly, stating “when the time comes to raise interest rates, we’ll certainly do that, and that time, by the way, is no time soon.”

Fiscal policy

President Biden was inaugurated in January and proposed a new $1.9 trillion stimulus package. The package would be the fifth coronavirus related stimulus and follows on the heels of the $900 billion package in December. Given the narrow majorities Democrats hold in both houses, compromise could limit the size and scope of the bill. Nancy Pelosi, Speaker of the House, indicated that both houses could utilize the reconciliation process by the end of the first week of February.

Earnings

As of the end of 2020, the expectations for fourth quarter earnings were a decline of 9.3%. With just under 40% of companies reporting earnings to date, the blended earnings have been only -2.3% according to FactSet. Revenues reported to date have grown 1.7%. The corporate landscape is expected to improve significantly in 2021, with projected earnings growth of 23.6% and revenue growth of 8.7%.

Outlook and conclusions

In our view, January may prove to be a microcosm of the new year. Optimism abounds for progress against the pandemic and a rapid economic recovery, but challenges remain on both fronts. While the trajectory is expected to be significantly positive, the path of economic rebounds is rarely linear. In this environment, rates continued to drift higher from their 2020 lows, however, did not break out as the realities of mixed economic data and significant monetary policy support contained rates. Non-governmental sectors performed well, largely driven by positive carry and epitomized by credit, which outperformed while spreads remained unchanged. Data is rarely as smooth in the short-term as it will appear in retrospect and we anticipate bumps on the road to recovery. The pause in credit spread tightening is welcome from our seat as the market digests progress to date versus the prognosis for the future. An interesting phenomenon has emerged from the rapidity of market recovery in 2020: with the riskiest market segments generally performing the strongest, we now find the segments offering the most relative value to also be the ones that were most defensive in the last bout of volatility. To us, this represents a narrow and unusual channel to position for both the expected recovery and a moderately disappointing one. Against this backdrop, the value of income is likely to be in focus.

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Disclosures

This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested. Investments cannot be made in an index. Past performance is not necessarily a guide to future performance.

All investments involve risk, including the possible loss of principal.

Taplin, Canida & Habacht, LLC is a registered investment adviser and a wholly owned subsidiary of BMO Asset Management Corp., which is a subsidiary of BMO Financial Corp.

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