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March market update: Yield has risen (but where do we go from here?)

For financial professionals only

Perhaps fittingly in the run up to Easter celebrations, through March government bond yields “rose again”, with UK 10 year Gilt yields rising to 0.85%[1], US 10 year Treasury yields hit 1.74%[2] and Euro area 10-year Government Benchmark bond yields reached  0.15%[3]. These are the highest levels in over 12 months, as investors migrated from defensive assets in hopes of a sustained recovery boosting riskier securities.

Because of the inverse relationship between prices and yields, these movements are directly damaging to fixed income investments as indicated by the FTSE UK Gilts All Stocks – down c. 7% over Q1[4].

Markets are Moving

 On the other side of that trend, though, equity markets largely rose over the month after an uncertain end to February. Though Asia-Pacific and Emerging Markets failed to recover their gains from earlier in 2021, we saw steady growth in the UK and US.

The former has been boosted by greater exposure to cyclical industries such as financials and energy, and with the positive vaccination roll-out heralding a route out of lockdown.  In the States, returns were driven by better than anticipated employment reports alongside a favourable healthcare and fiscal response to the pandemic courtesy of the still new Biden regime.

Source: FEfundinfo 2021

Growth across the Globe

 This broad sense of recovery, combined with both an understandably low 2020 base, and pent up demand, saw the IMF revise up their forecasts for the world economic growth to 6%[5]. It’s important to look deeper than headline figures such as this, though, as the chart below shows; there are considerable regional differences  in both recently realised and  anticipated growth in GDP, with China set to lead the charge.

Cautious growth looks set to come alongside reasonably supportive monetary policy. While earlier in the year there were fears around rate rises, Central Banks signposted their intention to “look through” inflationary noise this month and maintain their existing approaches.

Fed Chair Jerome Powell noted “The stance of monetary policy we have today we believe is appropriate”[6], indicating the US Federal Reserve is happy to let yields rise. Meanwhile, ECB President Christine Lagarde expressed a lower tolerance for rising yields, with the bank set to continue to use current asset purchase programs with “maximum flexibility”[7].

The Dangers of Debt

To have interest rate rises seemingly off the table will be welcome news to those with mounting debt. March gave us a timely reminder of the risks inherent in overleveraged positions, with the Archegos family office imploding in dramatic fashion.  The collateral hits to both the stock they held, and the banks they brokered with – Viacom and Credit Suisse most notably – also point to the contagion that can be wrought from a few bad eggs[8].

With that in mind, and keeping with the Easter theme, we are reminded of the benefit of diversification; with markets focused on the realisation of the pent-up demand as we move into earnings season, higher sales and corresponding dividend pay-outs may already be priced in, and it is when expectations disappoint that we appreciate not having all our eggs in the same basket.

[1] Markets.ft.com. 2021. UK 10 year Gilt Bond, chart, prices – FT.com. [online] Available at: <https://markets.ft.com/data/bonds/tearsheet/charts?s=UK10YG> [Accessed 8 April 2021].

[2] Markets.ft.com. 2021. US 10 year Treasury Bond, chart, prices – FT.com. [online] Available at: <https://markets.ft.com/data/bonds/tearsheet/charts?s=US10YT> [Accessed 8 April 2021].

[3] Sdw.ecb.europa.eu. 2021. Euro area 10-year Government Benchmark bond yield – Yield. [online] Available at: <https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=143.FM.M.U2.EUR.4F.BB.U2_10Y.YLD> [Accessed 8 April 2021].

[4] Research.ftserussell.com. 2021. FTSE Actuaries UK Conventional Gilts All Stocks Index. [online] Available at: <https://research.ftserussell.com/Analytics/FactSheets/temp/68baf9cc-077e-491b-a6f3-5e8b27672e53.pdf> [Accessed 8 April 2021].

[5] Bloomberg.com. 2021. IMF Lifts Global Growth Forecast, Warns of Diverging Rebound. [online] Available at: <https://www.bloomberg.com/news/articles/2021-04-06/imf-boosts-global-growth-forecast-warns-of-diverging-rebound> [Accessed 8 April 2021].

[6] Bloomberg.com. 2021. Fed’s Powell Says No Need to React to Rising Treasury Yields. [online] Available at: <https://www.bloomberg.com/news/articles/2021-03-17/fed-s-powell-says-no-need-to-react-to-rising-treasury-yields> [Accessed 8 April 2021].

[7] Bloomberg.com. 2021. Lagarde Says Market Can Test ECB Resolve as Much as It Wants. [online] Available at: <https://www.bloomberg.com/news/articles/2021-03-31/lagarde-says-investors-can-test-ecb-resolve-as-much-as-they-want> [Accessed 8 April 2021].

[8] BBC News. 2021. Credit Suisse axes bosses and bonuses amid Archegos losses. [online] Available at: <https://www.bbc.co.uk/news/business-56646755> [Accessed 8 April 2021].