Week in Review: Bond Yields Rise

Major global equity markets pulled back sharply over the week in response to a steep rise in yields. Inflation worries and stronger-than-expected economic data, combined to push the yield on the benchmark 10-year U.S. Treasury note to around 1.61% on Thursday afternoon, its highest level in over a year.

Anticipation that there will be a rise in inflation is causing investors to speculate the Federal Reserve may have to shift policy sooner than expected, although signs of consumer inflation remain muted the recent surge in commodity prices (oil prices are approaching their highest level since 2018) is one of the drivers increasing investor fears of future inflation.

In congressional testimony this week, Fed Chair Powel reiterated that while the economy is showing continuing signs of rebounding, the Fed will be patient before even thinking about removing the current accommodative monetary policy.

Early Saturday the House of Representatives passed President Joe Biden’s $1.9 trillion coronavirus relief bill, the legislation will now move on to the Senate. Given the current 50-50 split in the Senate amendments to the bill are likely with many Republicans questioning the overall size of the rescue package. Lawmakers are seeking to pass the bill before March 14, when expanded unemployment aid of $300 per week is set to expire.

The Food and Drug Administration has approved Johnson & Johnson’s Covid-19 vaccine for emergency use. Unlike Pfizer’s and Moderna’s vaccines, J&J’s one-dose regimen eliminates the need for patients to return for a second dose and it can be stored at refrigerator temperatures for months.

All three major U.S. averages posted weekly losses with the S&P 500 ending the week 2.5% in the red while the Dow Jones fell 1.8%, the tech-heavy Nasdaq lost 4.9% suffering its worst drop since October.

European equities followed the U.S. selloff with the Euro Stoxx 50 Index ending the week 2.07% lower. There continues to be frustration on the roll-out of vaccines in Europe. Only 6.4% of the population have received a vaccine, European Commission (EC) President Ursula von der Leyen said after an EU video summit. This compares poorly with the UK where more than 19 million people (approaching a third of the population) have received at least one dose of a coronavirus vaccine.

For the week, the Nikkei 225 Stock Average declined 3.5% and closed at 28,966.01. Chinese shares were not sparred the global sell-off with the Shanghai Composite Index down 5.06% by the close of the week.

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Market Moves of the Week

Locally, Finance Minister Tito Mboweni’s budget was largely welcomed by analysts. There was good news for taxpayers after the National Treasury decided to reverse an earlier decision to increase personal income taxes. The tax revenue shortfall has narrowed to R213bn after the SA Revenue Service (Sars) was able to collect a further R99bn. The forecast for the budget deficit was reduced to 14% from 15.7%. Higher excise duties were imposed on fuel, alcohol and tobacco sales and a levy on scrap metal exports was introduced. The government is also providing a further R2.2bn in tax relief to households through raising personal income tax brackets and rebates by 5%. Also, the corporate tax rate will be reduced from 28% to 27%. This will be for the years of assessment commencing on or after April 1 2022.

The JSE All Share Index ended the week down 1.97%, led lower by the industrial (-4.35%) and financial (-1.37%) sectors. By Friday close, the rand was trading at R15.13 to the U.S. Dollar, weakening by over 3% to the dollar this week.

WeeklyMovements
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Chart of the Week

During the month of February 10-year Treasury yields have moved from a low of 1.13% to as high as 1.61%, a rise of 48 basis points, the highest level in a year. Some economists say rates are moving up for the right reasons, that is reacting to positive economics as vaccines are rolled out and GDP forecasts improve, paving the way for a stronger rebound and improved corporate profits. While other economists say the higher yields could also be associated with the fear of higher future inflation expectations.

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