The dominant market story of recent weeks has been the rise in US government bond yields and the implications for asset markets and policy makers. Longer-dated government yields have been gradually rising from a low base since the middle of last year, reflective of recovering growth and inflation prospects. However, with vaccine distribution well under way, fiscal policy on full-tilt and a savings fuelled spending boom expected later this year, 10-year yields have climbed above pre-pandemic levels to 1.60% and financial markets are now pricing a US rate hike as early as December 2022 in response an accelerating US economy. As rate expectations have shifted, so too have asset prices sensitive to US yields. The US Dollar has strengthened and we have seen weakness in investment grade bonds, emerging market stocks, gold and the US technology sector, which had previously enjoyed a subdued growth outlook and collapsing yields. At the same time, strong growth and firmer inflation expectations have triggered equity market rotations with cyclical sectors such as energy, financials and materials all benefiting.

Although financial market performance has been mixed recently, the move higher in US yields has been orderly and steadily absorbed by wider asset markets, that said the risk of a more volatile spill-over has led some market commentators to speculate on US Fed policy intervention. Nothing in recent communications from Fed officials suggests an intervention is imminent. The rise in yields has been viewed as a function of economic optimism, not inflation fears, and there has been no suggestion of a rate hike before 2023. At the time of writing, the March meeting of the US Federal Reserve (Fed) was about to get underway – the committee’s statement and accompanying forecasts will be keenly watched.

Read the whole note here

 

 

 

 

Disclaimer: The value of investments and any income from them can go down as well as up and investors may not receive back their original investment amount. This communication is for information purposes only. It is not intended as a personal recommendation of particular financial instruments or strategies and it does not provide individually tailored investment advice. This document provides the views of the London & Capital Investment Team examining the fundamental background, economic outlook and possible effect on asset markets. This document is not an invitation to subscribe and is by way of information only. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision. If you are considering investing, you should consult your London & Capital adviser. The views expressed herein are those at the time of publication and are subject to change. Correct at time of going to press.
London and Capital Asset Management Limited is authorised and regulated by the financial conduct authority, 12 Endeavour square, London, E20 1JN. Firm reference number 143286. Registered in England and wales, company number 02112588. © London and Capital Asset Management Limited. All rights reserved. London and Capital Wealth Advisers Limited is authorised and regulated by the UK Financial Conduct Authority (firm reference number 120776) and by the U.S. Securities and Exchange Commission of 100 F street, NE Washington, DC 20549, with sec firm reference number 801-63787. Registered in England and Wales, company number 02080604. © London and Capital Wealth Advisers Limited. All rights reserved.