Thursday, Jan 7Hamish Risk | January 7, 2021
In the shadow of perhaps the most disturbing transitions of power in US history, the adults appear finally to have entered the room. And that means investors are bracing for stimulus and fiscal loosening that has seen Treasury yields break higher through key resistance levels. But how excited should investors get about entering the sunlit uplands of an orderly rotation into cyclical assets? In today’s Macro Briefing, Pantheon Macroeconomics explains that, while the move in yields was justified, the Biden administration still faces spending constraints and much more depends on the vaccination programmes than fiscal loosening as far as the economic recovery is concerned. RenMac on the other hand risks joining the graveyard full of the bones of analysts attempting to call a change in the trend of yields, saying the “Blue wave” descending on Washington represents a seminal moment that heralds a new monetary regime. Cornerstone Macro and MI2 Partners are more sanguine, however, with the former warning this is not the time to sell Treasuries and the latter warning of the potential for a VaR shock if rising yields undermine big tech stocks. Elsewhere, Ned Davis Research sets out why high-yield credit is set to thrive.
Fiscal policy stimulus Georgia senate runoffs Pantheon Macro
1. The Biden administration is still constrained despite Georgia wins
Ian Shepherdson at Pantheon Macro says anyone expecting the Biden administration to be able to put through its whole “Build back better” plan after the Democrats took control of the US Senate is in for disappointment. Essentially, he explains, Senate budget rules – specifically the Byrd rule- mean spending increases have to be funded by tax spending to pass with the 50 votes the party currently has. That doesn’t mean that some elements of the Democrats’ plan won’t be implemented, however, says Shepherdson, especially if they are matched by tax hikes or dressed up as stimulus packages that could boost the economy and thus still stay within the budget rules. Infrastructure spending and fiscal loosening disguised as Covid relief are, he says, are still very much on the cards – just don’t expect an explosion.
cyclical stocks US Treasuries Renaissance Macro Research
2. A seminal moment as 10-year Treasuries breach 1%
With arguably the most disturbing transition of power in US history, 10-year yields broke through their 1.0% resistance level confirming the strength of cyclicals, banks and even late-cycle names says Jeff deGraff at RenMac. Potentially it’s a seminal moment, he says, that will herald a new monetary regime that will last until the next generation’s dissatisfaction with profligate spending by US Congress sparks an economic revolution to supress money supply. Until then, argues deGraaf, bonds will be a bad bet. Click here for the full report and to discover why energy stocks may well be the best value “horse” to back as cyclicals gain momentum.
US Treasuries Cornerstone Macro
3. Do not sell your Treasuries in 2021
Despite its new dovish averaging inflation targeting framework, markets doubt the Federal Reserve’s commitment to keep the funds rate low for years and the same uncertainty applies to longer-dated Treasuries according to Roberto Perli at Cornerstone Macro. Yet on average, especially after the steepening in the wake of the Georgia Senate run-off, longer-dated Treasuries are closer to fair than rich value, he says. All in all, given Perli’s reading of how Treasuries are priced now relative to fundamentals, there is ample scope for rates to decline and for the curve to flatten if the Fed, as he suspects, proves more dovish than investors believe. In other words, says Perli, 2021 is not the year for investors to sell their Treasuries. Indeed, he explains why even with low yields and expected returns, Treasuries should continue to make portfolios more efficient, and any risk-reward angst with the standard 60/40 portfolio is just as likely to stem from investors holding too few, as opposed to too many, risk-free bonds.
US Treasuries yield curve MI2 Partners
4. Bonds the first shoe?
It’s hardly surprising bonds have taken events in the Senate run-off in Georgia badly, says Julian Brigden at MI2 Partners. After all, he says, in relatively short order Democratic control of the US Senate could boost the recent spending package, deliver a massive infrastructure package and, to rub salt in to the budget wound, their razor-thin majority may make it impossible to raise taxes to come close to offsetting the spending binge. Rising bond yields could be a healthy sign that the long-awaited growth/value rotation across all markets is finally going to happen, says Brigden. However, he warns investors should be on their guard as bond yields rise – especially since the US mega-cap names that have led markets higher since the height of the market panic in March have traded like ersatz bonds. As he puts it: how long until bond yields undermine theses highflying stocks and turn a healthy rotation into a VaR event that crushes all assets?
US credit Ned Davis Research
5. Seven reasons to remain overweight credit
Joseph Kalish at Ned Davis Research says improving credit indexes and rising banking liquidity present a favourable fundamental environment for credit. He is overweight credit and particularly favours high yield, in part due to its lower duration. Kalish says he could list more, but in his latest note he sets seven fundamental, technical and intermarket reasons to stay overweight.