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Our views 04 May 2021

JP’s Journal: Biden’s first 100 days

5 min read

Luck plays an important role in life. My colleague Azhar Hussain was talking to me about Biden’s 100 days and I reflected on a quote I heard on the radio last week: Boris Johnson has been lucky with his enemies. I think that could also apply to President Biden.

From a divided and predominantly left of centre Democratic field Mr Biden was able to position himself as a moderate and continued that through to the Presidential election where he was up against the most polarising President in recent memory.

We have now just passed the first 100 days of President Biden. He was elected with low expectations of what he would be able to achieve, with the outcome being contested and the Senate staying Republican. Within days, however, we had positive news on the vaccine front and by January everything changed, with the Georgia Senate run-off going Democrat and the failed agitation pre-inauguration emboldening the incoming President and his presidency.

What we have seen since then has been the most radical presidency for decades. It seems that the mild mannered Vice President of the Obama years has learned lessons from that period of relative inaction. We have seen a massive Relief Act aimed at reducing inequalities and boosting consumption. But in addition, a proposed Corporate Tax reform allied with an Infrastructure bill that could be transformative. Coupling this stimulus with the aggressive roll-out of vaccines across the US means that the US is likely to grow much quicker than anticipated. So what are the implications for fixed income markets? I remain of the view that government bond yields will rise and that those asset classes most sensitive to long-term higher rates will do worse. For me this is a background that supports high yield markets where the underlying sensitivity to government yields is lower, where credit spreads are widest and where there is scope for default rate expectations to fall further.

So far, the presidency has met the challenges that the US economy faces and sets a bar which the rest of the world is unlikely to meet. Globally, markets have been supported by these developments and it’s another reminder that global markets are still very much anchored around the US.

Cash, government bonds and currencies

Global cash rates were broadly unchanged on the week. The US dollar was a bit weaker across the board – with the euro gaining some ground against sterling.

The US Federal Reserve (Fed) left policy settings unchanged on Thursday although the tone was more positive on the outlook. There were no new forecasts but the statement acknowledged that activity had strengthened. In the subtle ways of central bankers, “considerable” was removed in relation to “risks to the economic outlook”.

On inflation, Powell (Fed Chairman) made clear that he expects inflation to rise in the near term, but that the “one-time” increases will be transitory. He also played down the idea that asset purchase tapering was under consideration and reiterated that the US is “a long way from full employment”. He also emphasised that any move on tapering asset purchases would be signalled well in advance.

Despite these soothing words 10-year US government bond yields moved higher – reaching 1.65%. Real yields moved up a bit, but implied inflation took more of the strain with 10-year breakeven hitting a YTD high of 2.4%.

In the UK 10-year rates also moved up, ending at 0.84% and implied inflation was higher across the curve. In the eurozone French 10-year yields moved decisively above zero and German yields ended at their least negative for the year. Italy was weak with 10-year yields at 0.9%.

We are not currently taking much duration risk in our government strategies.

Credit

Investment grade credit spreads were broadly unchanged – with sterling credit ending the week near the spread lows of the year. In the primary market we participated in a new issue from Nats (En Route) – a company that provides air traffic management and airport development services. The issuer bought back some existing bonds and issued a new 10-year at 0.85% over gilt yields. Not much to report of global investment grade this week.

In high yield markets, spreads continued to trend lower with my favoured index hitting a YTD high despite the back-up in government bond yields.

It is probably untrue that Napoleon ever said “give me lucky generals” but I think it is true that a famous golfer once remarked “the harder I practice the luckier I get”. Luck has undoubtedly played a part in my investment life – but it is how you take advantage of those fortuitous occasions that really matter. Let’s see whether President Biden’s luck holds.

 

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are the author’s own and do not constitute investment advice.