Fixed Income Analysis

The United States Fixed Income yields, and Inflation expectations have been on the rise for some time now. Investors are anticipating a sooner than later tapering by the Federal Reserve and a worldwide increase in interest rates as authorities try to weather a rise in inflation, after trying to get the economy back on track through the Covid-19 pandemic.

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The United States Fixed Income yields, and Inflation expectations have been on the rise for some time now. Investors are anticipating a sooner than later tapering by the Federal Reserve and a worldwide increase in interest rates as authorities try to weather a rise in inflation, after trying to get the economy back on track through the Covid-19 pandemic.

Theoretically and following the books, yields rise with inflation expectations. As investors expect inflation increases, they would demand an increase in yields to compensate for this increase in prices. Inflation expectations have rose to their highest levels in decades in the United States. This increase is mainly due to the fiscal stimulus, the accelerated vaccine rollout and news on the Covid-19 pill, and the increased consumer demand. All of which has led up to an increase in CPI (Consumer Price Index), the main index for inflation expectation.

In recent Federal Reserve meetings, authorities have maintained a cooperative and supportive tone regarding market tapering and interest rates.

Investors, nevertheless, believe otherwise. With all the reassurance from authorities, investors still expect that the Fed will increase rates and tighten market conditions sooner than stated. Bond prices move inversely to yields. With the Fed support unplugged, Bonds tend to decrease in price, moving yields higher.

Then again, Investors still believe that market conditions are going to be better in the future as the yield curve is getting steeper. A steeper Yield Curve indicates that there is a huge difference between short term and long term yields, consequently singling optimism in the market between investors.

The short term 2-year U.S Treasury note reached 0.36%. this level hasn’t been reached since the beginning of the pandemic. The highly watched U.S benchmark, the 10-Year Government treasury note rose to over 1.52% for the first time in months. The longer term 30-year U.S government treasury bond also rose to its highest levels of 2.02%.

 

This increase however is not solely due to inflation expectations. Brent crude, the international oil benchmark reached 83$. West Texas Intermediate Oil prices hit a high level high of 82$. This rise in oil prices is due to anticipated limits in supply as demand increases. Oil prices are not the only ones going upward, energy prices are on the hike too. That is mainly due to bottlenecks in supply chains.

This has spilled over to the stock market as indices edged lower on the news of increase in interest rates and natural resources prices.

This is not encompassed just in the U.S market. The Japanese and European fixed income market yields rose too on the news. The 10-year U.K government GILT rose to its highest levels of 1.222% to retreat to 1.047%. The 10-year German Bund also rose to its highest levels of minus 0.09% to slightly fall back to minus 0.183%. The Japanese 10-year Government Treasury note is at 0.076%.

 

Maya Ibrahim

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