Performance, February 2021
Expansive signals from the Fed
Over February, Fed governor Jerome Powell as well as a number of other members of the Fed’s interest-rate decision-making committee, FOMC, offered verbal back-up to an expansive interest-rate policy. Several mem-bers commented that rising long-term US interest rates are a signal of economic recovery, but that inflation is far from being at a level requiring that the Fed must begin raising its short-term interest rates. Moreover, it was signalled that supporting purchases of interest-bearing papers will continue at least throughout the year.
US President and Secretary of the Treasury talked about a new stimulus package
Over February, both US President Joe Biden and the US Secretary of the Treasury, former Fed governor, Janet Yellen, spoke in favour of further stimulation of the US economy - on top of the already implemented rescue packages. The desire about further fiscal-policy expansion was added although the recent US economic indica-tors showed strong advance in both personal consumption and sentiment indicators – yet strongly supported by the paid-out stimulus cheque.
Oil-price surges in February
Oil prices experienced a strong boost in February – supported by a blizzard in Texas which closed down oil pro-duction in the area. This resulted in an additional boost to an oil price which was already supported by improved growth prospects. Despite an 18% increase over February oil prices are, however, only back at the level from January last year – i.e. the oil-price level immediately before the coronavirus crisis took the breath away from economic growth.
Corona pandemic still makes headlines
The corona pandemic continued to hit the headlines in the course of February whereas the influence in the financial markets seems to be more moderate. The reason was presumably that the news from this front was a mixed bag. On the one hand, the roll-out of the vaccines is proceeding well in several countries and the infection figures are on the decline in for instance the US. On the other hand, the news about mutations and vaccine delays was lurking in the wings whereas vaccinations have made slow progress in Continental Europe, among other countries. All in all, the pandemic was, however, reasonably under control.
Good economic indicators and strong back-up from both the Fed and the US central administration resulted in tailwinds to the equity markets – especially the cyclical sectors and the financial sector whereas equities, which are typically seen as an alternative to bonds, took a beating from rising long bond yields. This especially affected utility companies whereas the top performers of the month were financials and energy. Banks typically benefit from increasing yields whereas energy equities benefited by surging oil prices. Both the US, Europe and Japan experienced a good month, whereas emerging equity markets, which so far this year have been among the investors’ favourites, could not follow suit in February.
In the Danish bond market, the trend of rising yields continued in February – and at greater strength. The higher yield level was due to confidence in an economic comeback when the vaccinations have been implemented. The rising yield level has had a significantly negative impact on the Danish bond market. Callable mortgage bonds were hit hardest. The rising yield level resulted in a sharp increase in price sensitivity which has been difficult for the market to absorb. In addition, the issue of callable bonds continued to be high, which can presumably be attributed to the high activity in the housing market. Early in the month, 30-year mortgage financing was made in 0.5% bonds. At the end of the month, this changed to 1.5% bonds which were briefly trading at prices below 100. The prices of the most sensitive callable bonds declined in February by up to 4 points.
Emerging bond markets can live with rising US yields, but if this takes place at a high pace, it often creates repercussions in the market. Fear of rising re-discount rates for the countries and fear of flight from the asset class fuelled the sentiment. So far, it has sent up yields in the emerging markets, but the credit spread only widened by 0.10 percentage point on average in February. In the local markets, the average yield has on aver-age increased in line with US yields but countries such as Nigeria and Brazil are battling with imbalances in the monetary policy and in the budget, respectively and are therefore punished with extra yield increases. The sustained price increases of oil and other commodities supported several commodity-exporting countries, and several of these performed well in February despite external yield disturbance. The focus of attention is still on the coronavirus development as several countries are experiencing a third wave whereas others are not very much affected. Estimates as to how fast and how solid the economic comeback will be in the individual countries fuel the trend in credit spread, yields and currencies.
In general, credit spreads narrowed throughout February, driven by renewed optimism about global growth and the coronavirus development. Oil prices are still on the increase so the bonds of energy companies generally performed well. In addition, companies with direct exposure against Covid-19 lockdowns showed good performances throughout February.