A Quick Update on Rates and Currencies
Air Date: April 21, 2021
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Hi, this is Leah Traub, Partner and Portfolio Manager in taxable fixed income.
INTERSTITIAL: Rates: The Current Environment
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So let's talk about what's been happening in the rates and the currency markets over the past few weeks. We had a very turbulent, I would say, first quarter in in the U.S. Treasury market, where we saw the 10-year yield rise to a level of about 1.75% which was an increase of 80 basis points over the first quarter. This was a very significant move and it was accompanied by an increase in in rate volatility, and also led to the [U.S.] dollar appreciating versus most other currencies, as U.S. rates became the highest in the developed markets.
And this was accompanied by a rise in inflation expectations as the economy was starting to reopen and we really saw the light at the end of the tunnel in terms of the COVID vaccines getting widely distributed and expectations for growth in the U.S. were surpassing those in the rest of the world. What we've seen, though, since the end of the first quarter is a little bit of a reversal--U.S. yields have actually fallen about 20 basis points as of mid-April, while other developed market yields have actually been rising. So in Europe, for example, we are seeing the 10-year yield start rising relative to the U.S. yield, starting to close a little bit of that gap.
Now the gap is still quite large with U.S. yields still remaining much higher than European yields. But as the U.S. reopening trade and the U.S. reflationary trade has gotten priced into markets, attention has been shifting more towards Europe, which is finally starting to see an increase in vaccine supply and distribution, and we are looking forward to the end of the lockdowns and the reopening happening in Europe.
INTERSTITIAL: Implications for Currencies & Global Markets
So this relative rate move has impacted the currency markets as well, and we have now seen the dollar index--there's a Bloomberg dollar index that measures, the dollar versus developed and emerging market currencies--we have seen that index actually retrace about half of the move that it had in the first quarter and that's mainly versus, you know currencies, like the euro and the yen and also some emerging market currencies.
Now we think this can continue for a little bit as the rest of the world kind of catches up, I would say, to where the U.S. has been in terms of the vaccines and the reopening. So we do see think we will see you know, maybe a more gradual rise in yields in the U.S. going forward with a reduction in rate volatility and we may see more rapid rises in some of the yields in the rest of the of the developed markets. And we could see a continual kind of you know reversal of some of this dollar appreciation.
The outlook for emerging markets is also becoming a little bit more positive as the U.S. rate volatility subsides--that's one of the headwinds to emerging market currencies starting to kind of outperform. We're seeing commodity prices start rising again, which is also very beneficial for the emerging markets, and we think that, while as you get into the second half [of 2021], we will start seeing their growth outlooks improve as well.
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