In our most recent “Macro Moment”, “Back in the Spotlight – Yields in Focus”, we stated that various changes in key macro variables, such as the ongoing COVID-19 pandemic, inflation, and rising market yields, meant that global investors should expect some market volatility ahead. Events over the last few weeks show that this development continues to play out.
The US Senate has passed the long awaited US$1.9 trillion fiscal stimulus package, with hopes of getting the trillion-dollar package to President Joe Biden in the coming days. There are also further signs that the labor market is recovering, as US initial jobless claims fell to a three-month low in its last reading. Falling infection rates, and the global rollout of COVID-19 vaccination programs, have further added to global optimism about the economic recovery and further socio-economic normalization. As we have indicated prior, this positive economic outlook, coupled with signs of coming inflation later this year, has pushed both real and nominal yields higher.
Given this backdrop, in our view it is the pace in the rise in yields, rather than the level itself, that has created recent market volatility. Since the global financial crisis, a (sudden) rise of 50bps or more in US 10-Year real yields, in less than a months time, has been associated with weaker or even negative equity returns. Since January 2021, yields on the US 10-year have increased 58bps, from 0.88% to ~1.50% in less than 2 months. As global equities adjust to this new backdrop, we are not surprised by the current market volatility.
Despite the ongoing volatility, we do stress for market participants to take a step back and look at the recent market rout in context. Global equities have reached record highs in February 2021, and despite the recent sell-off, remain up ~2.00% for the year so far. Consistent with our view that this latest slump for global equities is a volatility spike, rather than a fundamental shift in the market dynamics, we recommend to market participants to consider the following: