Reflation driven by US fiscal stimulus and the exit from lockdowns should lead to modestly higher inflation expectations and nominal bond yields; real yields will decline
A renewed ‘taper tantrum’ is unlikely as excess capacity and high unemployment rates will prevent inflation from reaching a level that would prompt either the US Federal Reserve or the ECB to signal a change in monetary policy
While corporate credit spreads are tight, robust economic recoveries this year should permit positive returns from carry
Emerging market debt spreads are attractive compared to developed market counterparts; improving capital accounts and the return of investor flows should support local currency returns
From despair to hope
The fortunes of financial markets continue to be driven by COVID-19 infection rates, virus mutations, vaccine development and rollouts, lockdowns, and the fiscal and monetary policy responses.
The near-term hurdles should eventually be overcome, however, and we believe the arrival of the eagerly awaited post-pandemic world has only been temporarily delayed. Another reason for optimism is further fiscal stimulus in the US, though the exact amount and timing are not yet known. Central banks are accommodating fiscal stimulus by purchasing enough government bonds to prevent real yields from rising. These factors should enable an accelerated recovery in economic growth in the second half of the year.