10-year government bond yields soared (despite the easing off on Friday). This has been going on since the start of the year but became more pronounced this week. It looked like this could have happened towards the end of 2020 but was checked by the renewed lockdowns. The success of the vaccination programmes across certain major economies (US, China, UK) together with programmes getting underway in others (Japan, Australia) are boosting sentiment and the notion of a return to growth. The effect of the latter is twofold: (1) a boost to earnings as business activity picks up and (2) the impact on inflation. Earnings are already being revised upwards. For example, S&P 500 EPS (earnings per share) for January and February increased by 5%. By comparison, during the last 5 years EPS has normally declined 3.5% during the same two months. It’s perhaps no surprise then that growth forecasts are being revised up too.
Central Banks Express Concerns
Central Banks have expressed their concerns over this sudden rise in yields. The Reserve Bank of Australia announced a surprise bond buying programmed to try and alleviate pressure on yields. Bank of Korea promised $6.3bn in new bond buying by end of June to provide rate support. The European Central Bank (ECB) had several leading figures trying to reassure markets. The issue for the ECB though is the potential impact on the Euro. If this starts to escalate higher, it could well hamper the Bloc’s recovery prospects on the back of trade / exports which the EU’s economy is highly dependent on. The question being asked is at what point the ECB ramps up its bond-buying programme to offset the impact of rising yields? For now, they are watching but not acting, arguing “an excessive tightening in yields would be inconsistent with fighting the pandemic shock to the inflation path”.
Bond vs Equity Yields
A comparison between US and EU bond and equity yields shows an interesting juncture. US yields for both are not that far apart (1.4% to 1.5%). US equities are trading on 22.3x forward earnings (historically it has been c16x). By contrast, in Europe, 10-year bond yields are around 1.1% while their equity counterparts yield 1.8%. If the EU can garner some proper momentum around its vaccination programme, EU stocks could become an attractive play to some investors.
The Week That Was...
In the US traders are bringing forward forecasts for when the Fed will raise rates; the first hike of +0.25bps is now seen happening in 2023, one year earlier. *
Investing involves risk including the loss of principal. No guarantees of investment performance are offered. Your account values will fluctuate and there will be periods involving negative returns. Investing requires a long term time horizon.
The advice provided by Skybound Wealth Management USA, LLC is provided through a registered investment adviser tailored to suit your individual circumstances and risk appetite. Reference to a registered investment adviser does not imply a certain level of skill or training.
Skybound Wealth Management LLC is part of the Skybound Wealth Management Group, for all Group regulatory details please visit our regulations page.