As we entered 2021, we believed the year’s performances and allocations were heavily dependent on inflation and the recalibration many investors would have to take in an elevated inflationary environment.
With interest rates on the move – and consensus believing the trend will continue into 2023 – many investors, especially those searching for income, are grappling with the potential fall-out of rising rates on their portfolios.
The 30,000-foot headline message can read that the stimulus payments to individuals will provide additional monies for essential needs and/or to spend on goods and services that would fuel the recovery of the economy impacted by the COVID-19 pandemic. With significantly more cash in the hands of the consumer/household than before the pandemic, along with the trillions of dollars in government spending, it can be argued that the economy is set up for an inflationary period.
Q1 2021 started out much the same way as Q1 2020 for US municipal markets, beginning with strong performance early in the year, only to be followed by volatility and a move to the downside.
The yield of the 10-year Treasury has risen 80% from the beginning of the year until the time of this writing (3/26/21). This got us wondering where we think we might park our money during a time of rising interest rates, and where to rotate to once they’ve peaked.
As many as 59 companies in the S&P 500 cut or eliminated their dividend in 2020 – yet the index still managed to grow dividends payments 0.44% from a year earlier and set a record payout to investors.
The first quarter of 2021 witnessed the continued migration from Growth to Value stocks. The performance gap between Growth and Value (as measured by the corresponding Russell indices) has narrowed significantly. This is something that – albeit expected – is a normal rotation that happens in every economic growth cycle.
AAM Viewpoints: A Look Back at the One-Year Anniversary of the Municipal Bond Market Selloff of 2020
As we approach the March Anniversary of the massive short-term sell-off of the Municipal Market, we can’t help but think of how resilient the bond market is and how important the Federal Reserve is for stabilizing our markets.
The historically low yields of 2020 forced many income-seeking investors to take on additional risk. First, they may have increased their duration exposure to capture the higher yields offered by longer-dated maturities. Or secondly, they may have migrated to “riskier” assets such as high yield corporate bonds as fiscal and monetary policy aimed to stimulate economic growth.
Outside of the oil crises, U.S. real yields have never been lower and global negative yield debt reached a record $18.38 trillion on 12/11/20, and as of Tuesday, 2/16/21 stands at $14.74 trillion. The U.S. 10-year Treasury real yield hit an all-time low on 8/6/20 at -1.08% and again on 1/4/21. It now stands at -1.04%. The previous low was in December 2012 at -0.92%.
The 337 days spanning the World Health Organization’s announcement of COVID-19 to the FDA approval of the first vaccine the world witnessed many social, economic, and scientific events few thought possible.
Stating the obvious, 2020 has not been a business-as-usual kind of year. Within months of its start it became a “year interrupted” by the global outbreak of COVID-19. That alone presented a massive challenge for the economy and potentially set a lasting course change for how business and daily life might be conducted for months and possibly years to come.