William John Market Report 16-07-21
William John assesses the downwards trajectory of yields in long term U.S. Treasuries
capital bonds, William John, treasuries, capital markets, inflation, returns, equities

William John Market Report 16-07-21

William John Market Report 16-07-21

Category: Reports

Long term U.S. government bonds have rallied over the past month as investors look for stable investments to secure their cash. Since 14/06:

Source: William John Analytics, U.S. Department of the Treasury

Yield, which moves inversely to a publicly traded bond price, move upwards when a bond’s demand is low and downwards when a bond’s demand is high, ceteris paribus. Over the past month or so, with U.S. Treasuries long term yields moving in a downwards trajectory, commentators believe investors high demand for long term government securities is two-fold. 

First, U.S. and European Equities remain near all-time highs, maintained in the short term by expectations of strong earnings as respective economies progress their reopening. However, this is not expected to last forever. With the majority of reopening already completed, earnings growth is nearing its peak for the pandemic era business cycle. Assuming the U.S., U.K. and Eurozone stick to irreversible reopening measures, it is unlikely that earnings will continue to grow as rapidly as they have since the start of the year. 

This has been reinforced in particular by Central Bank assessments that aggressive inflation exceeding 2% targets is merely a “transitory” effect of moving from a locked down economy to an open one. If the economists expect inflation not to persist – this must imply that these economies will cool down and adjust back to their pre-pandemic state, potentially boosting earnings a little further, but certainly assuring equities markets those earnings will not be growing at anywhere near the same rate as we have seen. 

Second, the rapid spread of the Delta variant across the world has threatened to derail the progress of economic reopening. Whilst early data suggests that successful and comprehensive vaccination programmes have broken the link between infection and hospitalisation, this is a reality reserved for only a few countries including the U.K. and the U.S. For the majority, vaccinating a sufficient number of the populace to prevent the Delta variant from creating a surge in unvaccinated hospitalisations remains a very real threat. With this being said, equity markets and specifically the manufacturing sector could take a hit in the coming months. According to Stephen Phipson, the CEO of Make UK which represents UK manufacturers, in a statement to the Financial Times on 14/07 he said, “in some cases, up to 20% of the workforce is now isolating”. 

With capital gains opportunities in equities markets reaching their summit, current inflationary conditions unlikely to perpetuate for the coming years (causing an erosion of long-term real returns) and the spread of the Delta variant threatening post-pandemic progress in under-vaccinated markets in Europe, it is not a surprise to see investors allocate more capital to long term U.S. treasuries. This trend is likely to persist and depress long term treasury yields further until vaccination progresses and companies adapt to functioning in a “pre-pandemic style” business cycle.

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.