As much as rising bond yields have been the talk of financial markets in the past two weeks, there is something different about the way government debt is reacting to signs of an improving economy. According to the BlackRock Investment Institute, a 1% increase in US 10-year equilibrium inflation rates, a measure of market inflation expectations, has generally led to a 0.9% increase in the 10-year Treasury yields since 1998. But since March 2020, equilibrium inflation has risen 1.2% and nominal yields have risen only 0.5%.
“We expect a stronger economy, a huge fiscal boost and rising inflation to further boost nominal returns this year, although less than in similar periods in the past. We expect central banks to lean on market concerns about rising debt levels and keep interest rates low for now, “strategists at the world’s largest fund manager said. On Monday, European Central Bank President Christine Lagarde said the central bank was closely monitoring bond yields, while Federal Reserve Chairman Jerome Powell told the Senate Banking Committee on Tuesday that the rise in bond yields “was in a way a statement of confidence” that there will be a strong and full economic recovery.
BlackRock strategists compared US retail sales to past recessions. “The different nature of the COVID shock means that activity has restarted much faster than it was seen in past business cycle recessions, and implies unusually high growth rates as a vaccine-driven reopening unfolds.” they said. BlackRock offers both long-term strategic and tactical insights from 6 to 12 months. But for both stocks and government bonds, they changed their strategic and tactical views by the same magnitude, citing the launch of the COVID-19 vaccine and US fiscal stimulus. BlackRock said it is underweight in bonds. of the government “since its capacity to act as a burden on the portfolio is diminished with yields near lower limits and the increase of the debt levels can eventually represent risks for the low rate regime.” BlackRock became overweight in equities. “We see a better earnings outlook amid subdued valuations. Incorporating climate change into our expected returns illuminates the attractiveness of stocks in developed markets given the heavy weights of sectors such as technology and healthcare in benchmark indices, ”he said. By region, BlackRock is overweight the US due to its exposure to technology and healthcare, and US small caps are targeting a cyclical rally. BlackRock has turned neutral from underweight European equities as there is room to close the valuation gap as the economic restart takes hold. Powell takes his low interest rate narrative to the House Financial Services Committee, while two key officials, Governor Lael Brainard and Vice President Richard Clarida, are due to deliver speeches. The US economic calendar also includes new home sales, while Germany reported a stronger-than-anticipated increase in fourth-quarter gross domestic product. President Joe Biden will sign an executive order to join with Taiwan, Japan, South Korea and Australia in building supply chains for semiconductors, electric vehicle batteries and rare earth metals, according to the Japanese newspaper Nikkei. The Washington Post reported that Biden will sign the order on Wednesday. Cathie Wood’s ARK Invest funds added $ 168 million in Tesla TSLA, -2.19% share on Tuesday, after the electric vehicle maker closed below $ 700, according to its website. Payment service Square SQ, -4.29% fell 4% after it announced a new investment of $ 170 million in bitcoin BTCUSD, + 6.42%, as it beat the fourth quarter earnings estimate with slightly better than expected revenue. PRA Health Sciences PRAH, + 0.34% increased 25% in pre-market trade after agreeing to be bought by Icon ICLR, + 0.18% in a $ 12 billion cash and stock deal. Bausch Health Companies BHC shares, -0.19%, rose to a five-year high in pre-market trading on Wednesday, after the pharmaceutical and medical device company said it struck a deal with the investor. billionaire activist Carl Icahn and that he will add two of his nominees to his Board of Directors. GameStop GME, -2.24%, the video game retailer, announced that its CFO would step down. Forbes reported that the board lost faith in Jim Bell’s ability to shift to an e-commerce approach. Also, Robinhood Co-CEO Vlad Tenev defended his company’s handling of the GameStop saga in an interview with Barstool Sports founder Dave Portnoy. US equity futures markets ES00, + 0.19% NQ00, + 0.16% were trending higher on Wednesday. On Tuesday, the S&P 500 SPX, + 0.13% ended higher after five consecutive losses. The yield on 10-year Treasury bonds TMUBMUSD10Y, 1.368% rose to 1.37%. Hong Kong shares, HSI, fell -2.99% after the government announced that it was increasing the stamp duty on stock trading. Random Readings A Chinese court rated a woman’s housework in a landmark divorce case at roughly what the country’s poorest earn. Night owls underperform early risers at work, according to a study. A new study finds that it is possible to create a nearly 100% accurate brain-computer interface for wheelchairs. Need to Know starts early and updates until the opening bell, but sign up here to receive it once in your email box. The emailed version will ship at approximately 7:30 am ET. Do you want more for the next day? Sign up for The Barron’s Daily, a morning investor briefing, featuring exclusive commentary from the Barron’s and MarketWatch writers.