US

Before the pandemic struck in February 2020, there were 159 million employed Americans; by the end of April that year, 26 million jobs disappeared. Since then, politicians and central bankers have focused on recovering all jobs lost to the pandemic fallout and returning to pre-COVID levels.

With all eyes on November 3 and the Fed’s next move, Paul Kim looks at supply chain disruption in the US and how its cost pressures have shifted the narrative on ‘transitory’ inflation.

Fixed income markets have experienced a reasonable correction over recent weeks and, for higher-yielding indices at least, their first negative period so far this year.

Given the prospect of central bank tapering and ultimately interest rate rises are looming ever larger, it is no surprise dealmakers are trying to take advantage of attractive financing terms while they still exist.

This looks to us like a buy-into-the-dip opportunity, but investors should be wary of taking on too much rate sensitivity as the move in risk-free curves is likely to persist until the rate hike cycle is actually on the way.

In the last month, global government bond curves have had a torrid time, with significant steepening seen across US Treasury, UK Gilt and German Bund yields.

Our base case is for a continuation of quite high growth and a modest inflation overshoot. For bond investors, positioning for stagflation could be a dangerous trade if that base case bears out

With ample job openings, inflation well ahead of target, financial conditions that are certainly not tight and strong economic growth, the obvious question is what does the Fed need to see to finally start tapering its asset purchases?

As we rapidly descend upon the fourth quarter of this extraordinary year, we think some of the risks fixed income investors faced back in Q1 will rear their heads again before the end of 2021.

As the Delta variant establishes a hold in many countries, forcing some governments to re-assess reopening policies, the market is beginning to feel its impact. The implication on growth remains unclear, but early indications suggest the growth rate may have peaked for this year, albeit continuing its recovery.

When combined with other prevalent market dynamics, the favourable ratings trend paves the way for a highly supportive fundamental terrain as we advance through the cycle and one that is ideal for portfolio managers selecting credits.

Given the magnitude of the amounts involved we do think there is potential for some temporary volatility in the US Treasury market as the volumes change. We will be keeping a keen eye on both in the months ahead.