What has happened
Inflation expectations retreated yet again yesterday with sovereign bond yields falling in sympathy. The important US 10-year Treasury yield is trading at 1.28% this morning. Now this trend has continued for over a week, investors are broadly joining one of two camps to explain the sudden shift.
Secular Stagnation
The secular stagnation argument was a leading view amongst market participants prior to the pandemic. The phrase effectively means long term low growth and heralds an era of low inflationary pressures. Faced with low inflationary pressures and a desire to kickstart economic growth, central banks keep interest rates extremely low and embark on novel measures such as quantitative easing. Of course it is too early to conclude that the 2009-2019 era will continue after the pandemic but the recent flattening of yield curves (implying little change in rates policy on the back of little growth) suggests that a growing body of investors believes the era will return. The catalyst for this shift in thinking is unclear but fears of a breakdown of OPEC supply curbs and lower concerns over labour market pricing power have contributed.
Federal Reserve Buying
The other explanation for the recent fall in bond yields is more technical and relates to the asset purchase activity of the US central bank. Asset purchases were of course a theme prior to the pandemic as the Federal Reserve’s quantitative easing programme continued to have a significant impact on the Treasury market however the pandemic saw a huge jump in quantitative easing firepower. Over the last three months the entire net supply of Treasuries into the market has been purchased by the Federal Reserve meaning that any foreign or domestic investor wanting to purchase Treasuries increased demand whilst supply remained flat. Given the amount of fiscal support provided over the last 18 months, there has been a significant quantity of money looking for a home, this has kept yields under control and will be a factor in the recent falls.
What do we think?
Whilst technical factors in the Treasury market are undoubtedly important, we believe the recent moves have more to do with the bond market increasingly buying the transitory inflation/secular stagnation narrative. Whilst we believe this is, on the balance of probabilities, likely to be the correct narrative, we are cautious of calling the victor too soon and will be retaining balance in portfolios.
| Index | 1 Day | 1 Week | 1 Month | YTD | |
| TR | TR | TR | TR | ||
| MSCI AC World GBP | 0.0% | 0.7% | 4.0% | 12.0% | |
| MSCI UK All Cap GBP | 0.3% | 1.6% | 0.9% | 13.4% | |
| MSCI USA GBP | 0.1% | 1.4% | 6.4% | 15.2% | |
| MSCI EMU GBP | 0.4% | 0.4% | -0.4% | 11.2% | |
| MSCI AC Asia ex Japan GBP | -0.6% | -2.3% | 0.6% | 3.0% | |
| MSCI Japan GBP | -1.0% | 0.1% | 0.5% | 0.4% | |
| MSCI Emerging Markets GBP | -0.5% | -2.3% | 0.2% | 4.0% | |
| MSCI AC World IT GBP | 0.2% | 1.9% | 9.9% | 13.5% | |
| MSCI AC World Healthcare GBP | 0.3% | 1.3% | 7.1% | 10.2% | |
| Barclays Sterling Gilts GBP | 0.5% | 1.5% | 2.8% | -4.4% | |
| Barclays Sterling Corps GBP | 0.3% | 1.1% | 2.1% | -1.7% | |
| WTI Oil GBP | -1.7% | -1.7% | 7.2% | 47.2% | |
| Dollar per Sterling | 0.0% | -0.2% | -2.7% | 0.9% | |
| Euro per Sterling | 0.3% | 0.3% | 0.6% | 4.6% | |
| MSCI PIMFA Income | 0.4% | 1.0% | 1.8% | 7.1% | |
| MSCI PIMFA Balanced | 0.4% | 1.1% | 2.2% | 8.3% | |
| MSCI PIMFA Growth | 0.4% | 1.2% | 2.5% | 10.3% | |
Source: Bloomberg as at 08/07/2021. TR denotes Net Total Return
