UE-EN Institutional

March 2021 Fixed Income Market Update

Rates have been a notable outlier in the general market recovery since the first quarter of 2020 and some reversion is warranted.
March 2021

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News & nuggets

Virus & vaccine

At the end of February, the Food & Drug Administration approved Johnson & Johnson single use coronavirus vaccine for emergency use in the U.S. Along with increasing production of the Pfizer and Moderna vaccines, the supply of vaccines is expected to grow significantly by spring.

The U.S. has been averaging 1.7 million vaccines administered per day over the last 7 days. In the U.S., more individuals have received at least one dose than have tested positive for COVID. As of the end of February, approximately 50 million Americans (~15% of the population) had received the first shot with approximately 25 million having received the second as well.

Fiscal policy

On February 27th, the U.S. House of Representatives passed a $1.9 trillion stimulus package. The bill included a provision to increase the minimum wage to $15 an hour. The senate is likely to pass the bill via reconciliation, however, the Senate parliamentarian ruled that a minimum wage hike is outside of the scope of the reconciliation process. With an annual GDP of approximately $20 trillion, the package represents about 10% of GDP, a significant figure, particularly on top of prior packages.

Monetary policy

Minutes from the Federal Open Market Committee January 26-27 meeting contained few surprises. The Fed noted their improving medium term outlook given progress on vaccines and the December stimulus. While inflation has been a growing topic, the minutes showed most Fed members were more concerned regarding the risks of low inflation.

Optimism regarding the vaccine and stimulus has led some to believe the Fed will be forced to reduce accommodation sooner than indicated. On numerous occasions during the month, the Fed took the opportunity to remind markets of their intent to deliver accommodative policy for an extended period.

Earnings

With 96% of companies reporting, fourth quarter 2020 earnings have grown 3.9% according to FactSet. This would mark the first quarter of positive earnings growth since the fourth quarter of 2019. This growth is noteworthy given the original expectations for the quarter. As of the end of 2020, the expectations for fourth quarter earnings were a decline of 9.4%. For the full year 2020, earnings are set to decline 11.2% with a 1% decline in revenues. Corporate profits are expected to rebound sharply in 2021, with earnings growth of 23.9% and revenue growth of 9.3%.

Outlook and conclusions

Depending on the timeframe, 10 year Treasury yields have either tripled since their 2020 lows or are effectively flat to where they were a year ago. Given the recent rapid rise of rates, particularly on a percentage basis, the rate move has attracted attention. From our perspective, rates have been a notable outlier in the general market recovery since the first quarter of 2020 and some reversion is warranted. We are less convinced though that this move represents the beginning of a true breakout for rates. Growing expectations of inflation are understandable, but we believe they are overstated. Further, the Fed has taken pains to remind markets of their intention to provide accommodation; rates rising too significantly could constrain financial conditions, the opposite of the Fed’s desired outcome.  Similarly, fresh off the 2018 experience, we see potential for friction in risk markets if rates were to rise too abruptly; if this were to materialize, even a mild risk-off period could lead rates back lower.  Economic data has improved, particularly in terms of corporate profits, and expectations are for significant further improvement. Against this backdrop credit spreads are reasonable, but in a historical context they remain toward the tighter end of ranges, leading us to some caution in positioning. We continue to observe that the riskiest securities and sectors have rallied the most, leaving cross-sector value in segments likely to be more defensive in a risk-off environment. Within that framework, we continue to see relative value opportunities across the sector, quality and security levels and strong demand for income generating assets.

Disclosures

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

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.

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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