Performance, June 2021


Inflation debate continued in June amid fears about the Delta coronavirus variant
The global economies are staging a strong recovery in step with the growing number of people vaccinated and falling infection rates. These developments were also prevalent in June with cyclical sectors outperforming and with economic indicators, inflation in particular, continuing to point upward. New data showed that the EU countries are catching up after having lagged behind the US and the UK for some time. EU confidence indicators for June showed the biggest increase for 15 years. Industrial production in the US, Europe and Japan moved closer to pre-pandemic levels in June. So far, the Delta variant of COVID-19 has not derailed the global economy or investor confidence, but the aggressiveness of the new virus variant has been a latent threat.

US Federal Reserve (Fed) recognised the economic recovery
The US Federal Reserve (Fed) has recognised the economic recovery. This was confirmed in the wake of the latest FOMC meeting at which the Fed kept its policy rates unchanged. However, a survey among FOMC members showed that the timing of the first rate hike has been moved forward from 2024 to 2023. Before then, however, a number of quantitative measures will need to be tapered – including the Fed’s market purchases of interest-bearing securities. Fed chair Jerome Powell maintained the monthly purchases, but indicated that it may soon be time to reconsider that decision.

Market return
The global equity markets resumed the positive momentum in June, strongly supported by the US, which regained momentum with equities rallying by more than 5% in June to reach record-high levels. The rally was underpinned by USD appreciation, however. The positive developments in EM equities continued from May into June, when these markets rose by some 4% – although the dollar appreciation accounted for around half of the performance. Europe found it difficult to keep up, but still managed more than a 1% increase. Cyclical sectors, headed by IT and energy, enjoyed the strongest benefits from the positive growth signals, while fears of rising interest rates are weighing on a sector like utilities. While oil prices moved higher, prices of metals like copper fell, which had a negative knock-on effect on materials equities. China played a role in these developments because they took a number of steps to dampen speculation in the commodities market, for example by releasing an unknown volume from its strategic inventories and by restricting trading in selected commodity futures.

The Danish bond market saw moderately declining yields in June. As has previously been the case, there were movements in long-term yields, while yields on bonds with maturities of up to three years were largely unchanged. Callable bonds took the headlines in June. The segment recorded the best performance with returns in excess of 1% in the longest maturities. The performance was driven by strong demand for callable bonds combined with reinvestment of coupon payments and drawings for the July payment date. Generally speaking, all segments delivered positive returns in June. Short-term government bonds underperformed, while longer-maturity government bonds delivered decent, positive returns. ARM bonds yielded returns of between 0% and 0.25%.

EM bond investors generally achieved positive returns in June. The yield spread between EM bonds and government bonds widened slightly in June, while underlying US Treasury yields fell by 10-15bps. At the same time, currencies in EM bond markets generally appreciated vs. EUR and DKK. These countries have widely different strategies for tackling the COVID-19 pandemic – not only in terms of healthcare approaches, but also in terms of how to employ monetary and fiscal policy tools to support the economies. While the final outcome of the pandemic remains unknown, there is much to indicate that most countries will end up with a larger debt burden. Also, there are indications that parts of the growth improvements in 2021 will be eaten up by rising inflation. On the other hand, the Fed and the European Central Bank continue to pursue highly accommodative monetary policies. Market rates therefore remain low, and investors are seeking higher yields in, for example, EM bond markets, helping to underpin these markets.

Investors experienced a very quiet month in the corporate bond market, where inflation uncertainties and various COVID-19-related reopenings and lockdowns have had little impact on yields and spread levels. Yield spreads to government bonds have thus been moving sideways. While the new issue market has witnessed fair activity, new issue premiums have generally been low or even negative.