6 May 2021
Distinctions in duration
With expected strong data already priced in, any near-term downside surprises could make the market more sensitive to weak data than it is to strong data, although the long-term bias remains to higher yields and steeper curves.
As expected, the global recovery story continues to play out. The vaccine distribution and reopening narrative has led to stronger economic data. In the long term, we expect the unprecedented fiscal stimulus out of the US (USD 2.8 trillion in just the past six months) to push inflation higher and ultimately lead to tighter central bank policy and higher yields. In the near term, however, we think the picture for rates is more nuanced. Although we still expect to see strong data prints, we have likely seen the peak in data acceleration in the US. With no obvious immediate catalysts for the rates market, and positive economic data releases already seemingly priced into current market levels, the risk is that the market may be more sensitive to weak data than it is to strong data. In the eurozone, however, we continue to witness a catch-up story as vaccine distribution and reopening themes provide a more bearish outlook for European core yields.
Europe has moved past the vaccine supply disruption it faced earlier in the year and is now catching up with the rest of the developed world. As a result, we believe there is scope for European core yields to sell off. Some of this move has already occurred – 10-year German Bund yields have risen 35 basis points this year to -0.22%, as of 5 May 2021 – and could have further to go as mobility increases in Europe and borders open to tourism later in the year. That said, in the long term, structural headwinds, such as low inflation expectations, will put a cap on how high yields can rise.
Mobility data in Europe has picked up rapidly
Demand dynamics also support this nuanced short-term versus long-term duration view. In the near term, following the end of Golden Week in Asia on 5 May 2021, investors are back in the market and there’s potential for increased demand. Foreign investors like stability in US Treasury yields, and with US yields currently range bound, this could create an attractive opportunity for Asian investors. Underlying seasonal data will also be important, as May is generally a risk-off month that historically has seen investors buying duration. In the long term, however, we expect the Federal Reserve to start tapering its quantitative easing purchases in early 2022, which would significantly shift the demand picture and likely drive yields higher.
What does this mean for fixed income investors?
The short duration view that was largely consensus across the market at the start of this year is now more nuanced, in terms of time horizon, yield curve and region. In the long term, due to fiscal policy and the reopening narrative, the bias remains to higher yields and steeper yield curves. In the near term, however, with expected strong data already priced in, any downside surprises could make the market more sensitive to weak data than it is to strong data. On the flip side, Europe is catching up in terms of vaccine distribution, which could lead to a move higher in European core duration.
About the Bond Bulletin
Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.
Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.
Fundamental factors include macroeconomic data (such as growth and inflation) as well as corporate health figures (such as default rates, earnings and leverage metrics)
Quantitative valuations is a measure of the extent to which a sector or security is rich or cheap (on both an absolute basis as well as versus history and relative to other sectors)
Technical factors are primarily supply and demand dynamics (issuance and flows), as well as investor positioning and momentum