Fundamentals

As expected, the advancing vaccination programme and reopening narrative in the US has resulted in strong data prints recently. In addition to the March jobs report, which recorded a near 1 million rise in payrolls, and the Institute for Supply Management’s services index, which has hit its highest level since 1997, there has been further positive news this week with an upside surprise from the US inflation print. The core consumer price index rose by 0.33% month-over-month in March, with strong rebounds in Covid-19 impacted sectors, such as transport and shelter, bringing year-on-year headline inflation to 2.5%. Rents, although relatively weak, also seem to have tentatively stabilised. Upcoming US data prints have the potential to surprise to the upside: with most stimulus cheques already distributed, we expect future consumption data to be strong. Also supportive is the fact that the US now leads the major economies in the pace of vaccinations, although the potential for restrictions on the Johnson & Johnson vaccine could pose tail risks to the fundamental backdrop.

Quantitative valuations

US Treasury yields have had a wild ride year-to-date. The 10-year US Treasury sold off by 82 basis points (bps) in the first quarter of 2021, hitting a high of 1.74% at the end of March. This sharp move in rates ultimately led to the worst quarter since 1994 for government bonds. Recent moves, however, have been less volatile, with 10-year US Treasury yields trading in a fairly tight 1.55% to 1.75% range. Despite the strong data prints, Treasury yields have actually rallied by 12bps in the first two weeks of April, thus indicating valuations are fair. To move lower from here we would need to see sustained negative news on the vaccine front, such as major supply disruption or possible new variants of Covid-19. Our ultimate view, however, is for higher rates, although to push out of this near-term range would require a strong sustained pick-up in inflation, more specifically in shelter and Covid-19 impacted areas.

Despite strong data prints, US Treasury yields have actually rallied

Source: Bloomberg, J.P. Morgan Asset management; data as of 13 April 2021. The US macro activity impulse is a timely macro-economic indicator of activity trend.

Technicals

A sustained pick-up in inflation isn’t the only catalyst needed to push us out of the near-term range. Cleaner investor positioning is also needed as curve steepeners and Treasury shorts are still the consensus in the market, making it difficult for yields to sell-off. On the flip side, a pick-up in foreign demand has the potential to keep a cap on higher yields in the near term. Overseas investors may be tempted by the combination of higher government bond yields in the US, even on a currency-hedged basis, and the recent rate stability.