As the first quarter draws to a close, all eyes are on the rollout of nationwide vaccination programmes with – Israel aside – the US and UK pretty much level-pegging ahead of other countries. In the US, president Biden more than made good on his promise of 100 million jabs in his first 100 days, as well as delivering his $1.9trn (£1.4trn) stimulus package, with cheques reaching households within days of legislation being passed.
Lockdowns are easing with falling case numbers state by state. Further spending plans and policy initiatives on infrastructure investment and the energy transition are in train.
No wonder the focus of investors year to date has been on rising bond yields. Expectations coming into 2021 were for a gradual reopening of the US economy, with a commensurate drift up in 10-year bond yields to, say, 2 per cent over the course of the year from their unprecedented lows last summer of around 0.5 per cent.
Well, there has been nothing gradual or drifty about it. Yields have spiked to 1.75 per cent in weeks; 2 per cent looks achievable in days. Investors have looked to the US Federal Reserve chairman Jerome Powell to ‘do something’ to arrest the rise in yields – ideally reference that if this rise in yields gets too pronounced, the Fed can always initiate a policy of yield curve control to mitigate it.
Powell has refused to do so, merely reiterating that Fed policy will remain easy and supportive for months to come, and that despite the stimulus measures, there is a long way to go until the Fed would adjudge full employment to have been reached.
Cue more wailing and gnashing of teeth from bond investors. For once, my sympathies lie with the central bank. To look at nominal bond yields in real terms, the rise in nominal yields has taken real yields from over 1 per cent negative to around 0.5 per cent negative. If we reach 2.0 per cent nominal, that would approximate to a 0 per cent real yield.
But real yields should not be negative in a situation where we have climbed out of the abyss of emergency policy measures. It is entirely appropriate for them to have risen in response to the vaccination rollout and reopening.
Without a resurgence in the dollar alongside higher bond yields, which would have negative consequences for global growth particularly in emerging economies, the Fed should stay put, allowing investors to adjust to the welcomed normalisation of activity during 2021 and into 2022.
Higher bond yields have, of course, been key to the reversal in fortunes of growth against value stocks that we have witnessed since last November’s vaccine news broke. Tediously, we have entered a period where the markets obsess over every twitch in bond yields or auction coverage ratios – there is a cost to all this stimulus and it is in heavy bond-issuance calendars – and rotate between styles as a consequence.
It is to be hoped that investors will settle down as the speed of the yield move ameliorates. The focus then can be on the beneficiaries of reopening and recovery – and none more so than the UK.
Government roadmap
With the government having set out a gradual roadmap for reopening, it was sensible for the Budget to follow up with an extension of support measures well beyond this reopening timetable. Striving to ensure the easiest of transitions from lockdown to normality, this is designed to support the labour market and avoid any dramatic spike in unemployment as furlough measures wind down.
Thus far, unemployment has risen far less than most expectations, so trying to maintain this record is sensible. Likewise, further support for the housing market will keep the current buoyancy going for this important sector.
Given UK consumers’ willingness to spend, the scale of pent-up demand and the increased savings built up during lockdown, a meaningful boost in consumption is likely to develop from this summer until next.
So, the chancellor chose to focus on incentivising corporate investment over the next two years through a series of measures, notably the most generous tax allowances against capital investment ever seen in the UK. While one can argue the degree to which these allowances just bring forward expenditure, with a commensurate lull thereafter, historically companies do seem to have responded.
Alongside the probable boom in consumer activity over 2021-22, it seems likely that the corporate sector will also play its part, alongside government initiatives towards its regional ‘levelling-up’ and energy-transition agendas. GDP forecasts for next year have risen materially as a result.
While there is a sting in the tail for companies in significantly higher corporation tax two years out – and frozen personal tax thresholds for individuals – it is hard not to be optimistic about the UK economy as we emerge from lockdown over the course of the coming months.
Richard Buxton is head of UK Alpha strategy at Jupiter Asset Management
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