Bond yields rise as economy poised to reopen


The noise

  • Boris Johnson hailed a significant milestone on Monday as the country recorded 15 million vaccinations against Coronavirus; over 25% of the adult population have now received at least one dose. Scientists at Imperial College London have noted a "strong decline" in levels of Coronavirus infections in the UK since January. Between 4th and 13th February, one in 200 people tested positive for the virus, similar to levels seen back in September 2020.

  • Rising government bond yields have dominated market noise this week with the yield on 10-year US Treasuries (US Government bonds) rising to its highest level in over a year. Equity indices wobbled in response to these dynamics with fears that rising borrowing costs could derail the already fragile economic recovery.

  • On Saturday, Donald Trump was found not guilty in his impeachment trial, ending a legal battle that bitterly divided the US. The Senate, with the support of the ex-president's fellow Republicans, voted to acquit him 52-48 on charges of abuse of power and 53-47 on obstruction of Congress.

The numbers



The nuance

Government bond yields have moved up this week in both the UK and the US. The flight-to-safety last year bid up the prices of these safe haven government bonds, depressing yields to the lowest levels since records began. With economies set to reopen and consumer demand set to be unleashed, market participants are perhaps beginning to assess the likelihood that this causes inflation to rise, thus spurring investors to demand a higher yield on these assets. As the numbers show above, this has caused the UK Government bond index to fall nearly 2% this week.

The question for investors is at what point this starts to become a larger issue for the wider market. Riskier assets tend to sell off when yields become elevated and stocks were mixed this week as investors mull the potential impact of these rate rises. We keep a close eye on the situation, monitoring yields carefully and considering at what level central banks might be forced to act in order to keep government borrowing costs low.

The most vulnerable assets to rising yields are those whose cash flows are projected to arrive far into the future. The most prominent names in this cohort are the low-earnings, high-growth names which have been so in vogue over prior months. Our valuation discipline has steered us away from these higher uncertainty businesses and thus our portfolios are well positioned to weather the storms if yields rising does indeed spill over into equity markets.


Quote of the week

“He would rather go back to prison than have to spend more time with the people he was living with.” 
Inspector Darren Taylor, Sussex Police

A wanted man in Sussex handed himself into police on Thursday, stating that prison was preferable to isolating at home, leaving plenty to ponder. What does his ex say when she’s asked about her dating history?

“Why did your last relationship end?”

“Oh, you know, he wanted more freedom… in prison.”

Now it’s certainly true that flatmates, spouses and children can, at times, be grating; but none of them have ever tried to shank, rob or force me to join a prison gang, so at least they have that going for them. Stay strong out there…



Phil Smeaton
Chief Investment Officer

All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

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