10-year government bond yields soared (despite the easing off on Friday). This has been going on since the start of the year but became more pronounced this week. It looked like this could have happened towards the end of 2020 but was checked by the renewed lockdowns. The success of the vaccination programmes across certain major economies (US, China, UK) together with programmes getting underway in others (Japan, Australia) are boosting sentiment and the notion of a return to growth. The effect of the latter is twofold: (1) a boost to earnings as business activity picks up and (2) the impact on inflation. Earnings are already being revised upwards. For example, S&P 500 EPS (earnings per share) for January and February increased by 5%. By comparison, during the last 5 years EPS has normally declined 3.5% during the same two months. It’s perhaps no surprise then that growth forecasts are being revised up too.
Central Banks Express Concerns
Central Banks have expressed their concerns over this sudden rise in yields. The Reserve Bank of Australia announced a surprise bond buying programmed to try and alleviate pressure on yields. Bank of Korea promised $6.3bn in new bond buying by end of June to provide rate support. The European Central Bank (ECB) had several leading figures trying to reassure markets. The issue for the ECB though is the potential impact on the Euro. If this starts to escalate higher, it could well hamper the Bloc’s recovery prospects on the back of trade / exports which the EU’s economy is highly dependent on. The question being asked is at what point the ECB ramps up its bond-buying programme to offset the impact of rising yields? For now, they are watching but not acting, arguing “an excessive tightening in yields would be inconsistent with fighting the pandemic shock to the inflation path”.
Bond vs Equity Yields
A comparison between US and EU bond and equity yields shows an interesting juncture. US yields for both are not that far apart (1.4% to 1.5%). US equities are trading on 22.3x forward earnings (historically it has been c16x). By contrast, in Europe, 10-year bond yields are around 1.1% while their equity counterparts yield 1.8%. If the EU can garner some proper momentum around its vaccination programme, EU stocks could become an attractive play to some investors.
The Week That Was...
In the US traders are bringing forward forecasts for when the Fed will raise rates; the first hike of +0.25bps is now seen happening in 2023, one year earlier. *
Skybound Wealth Management Limited FF2, MBP3, Meadowhall Business Park, Carbrook Hall Road, Sheffield, S9 2EQ
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
The guidance and/or advice contained within this website are subject to the UK regulatory regime, and are therefore targeted at consumers based in the UK. Skybound Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. Registered Office - MBP3, Meadowhall Business Park, Carbrook Hall Road, Sheffield, S9 2EQ. Registered Number 04479650, England. Financial Conduct Authority Number 217994.
The information contained within this site is subject to the UK regulatory regime and is therefore targeted primarily at consumers based in the UK. The Financial Ombudsman Service (FOS) is an agency for arbitrating on unresolved complaints between regulated firms and their clients. Full details of the FOS can be found on its website at www.financial-ombudsman.org.uk. Neither Skybound Wealth Management Ltd nor its representatives can be held responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.