Gauging the Global Impact of Rising Yields | Lord Abbett
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Economic Insights

Lord Abbett Portfolio Manager Leah Traub discusses the implications for asset markets and currencies. 

Transcript

AM with a PM

Leah Traub, Ph.D.

Partner & Portfolio Manager

Air Date: March 10, 2021

Hi, my name is Leah Traub. I’m a partner and portfolio manager in taxable fixed income.

INTERSTITIAL: Rates: The Current Environment

Let's talk about this crazy move that we've seen in the [U.S.] Treasury yield over the last couple of weeks.

We had a 50 basis point rise in the 10-year yield or about a half a percent move, which is really quite significant--it's about two and a half times the move that we would expect to see in a normal environment. So rate volatility has definitely returned.

So why have we seen this rise? There are three fundamental reasons. The first is, following the January 6th Georgia election runoff, the Democrats gained 50 seats in the [U.S.] Senate, giving them a slim majority. This really increased expectations of the amount of fiscal stimulus that we're going to see this year. There is a large bill working its way through Congress right now and then we are expecting to maybe see another bill focused on infrastructure later this year.

That is coming at a time when the economy is reopening and rebounding. The news on the vaccine front has been very positive, we now have three vaccines that have emergency use authorization by the FDA. And we're seeing a rise in the dissemination of vaccines every single day. This is allowing parts of the economy to reopen--you know, restaurants are reopening [and] a lot of leisure activities are coming back.

And it really means that economic growth over the next couple of quarters should be very, very strong.

And then finally on the third front, we have a very stimulative [U.S.] monetary policy. The [U.S.] Federal Reserve has said that they are not going to raise interest rates, until we actually see inflation average above their target of 2% and at the same time that we're seeing the unemployment picture ease and the unemployment rate come down and employment expanding. So this means that we don't expect any change in Federal Reserve monetary policy any kind of tightening or removal of quantitative easing, at least for the next year, if not longer.

INTERSTITIAL: Implications for Markets

So those three reasons are combining to greatly increase the expectations for inflation and for growth going forward and that's manifested itself in this rise in interest rates. Now as long as the rise is gradual and corresponding to positive fundamentals in the economy, you know, other areas of the market should be just fine. It is when the move gets very rapid and almost disorderly that maybe parts of the equity market and maybe parts of the credit market could feel a little bit of tension—and we saw a little bit of that over the past couple of weeks. So that's something we are really looking out for--that pace [of] how quickly yields are going to rise.

We have seen some spillover to the currency markets and to the commodity markets with commodity prices being very, very strong this year--again, corresponding to these more positive outlooks on growth, coupled with some supply restrictions, due to Covid and other reasons. And we are seeing strength in the dollar After a pretty weak 2020 for the dollar, we are seeing the currency market starting to come back.

Thank you for listening and thank you for your continued interest in Lord Abbett.

________________________________________

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

Market forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may be subject to greater risk than higher-rated bonds. No investing strategy can overcome all market volatility or guarantee future results.

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