Rising government bond yields spooks equity investors

Blog
Friday 26th February 2021

Rising government bond yields spooks equity investors

Blog
Friday 26th February 2021
Written by Chris Lioutas

Markets:

  • Local and global equity markets fell this week on concerns that potentially higher inflation in the US may force the US central bank to be less accommodative.
  • Concerns about rising US inflation and optimism regarding vaccine distribution saw government bonds get dumped (ie. prices fall, yields rise) in one of the ugliest weeks for bond markets in some time. However, higher bond yields also attract buyers, especially in a low-yield environment, in addition to central banks wanting to keep yields low to ensure lower borrowing costs.
  • In local stock news, Australia’s biggest fuel seller Ampol, expects market conditions to remain challenging in 2021, with travel restrictions likely to continue denting fuel demand, particularly jet fuel demand. The company reported a loss in its refining business for 2020, with the company set to decide whether it will close its last remaining refinery in Australia.
  • Property developer Lendlease posted a 1st half earnings decline of 37% as Covid-19 stifled building development. The company reported net profit after tax of $196 million and a loss of $7 million from property write-downs.
  • Former Commonwealth Bank boss Ian Narev will take the top job of jobs website company Seek, after leading the companies Asia-Pac and Americas operations since joining 2 years ago. Current boss Andrew Bassat will take the role of executive chairman and chief executive of Seek Investments. The company reported an 8% dip in 1st half net profit.
  • The oil price rose strongly this week on re-opening optimism. Saudi Arabia and Russia remain on opposite sides of the debate about crude oil output ahead of their monthly OPEC+ meeting in March. The Saudis have been constraining supply in order to get the oil price higher, with higher oil prices also being supported by increasing demand globally and short-term supply issues in Texas.

Economics:

  • Australian retail trade gained 0.6% in January, an improvement on the 4.1% fall in December, but still impacted by state lockdowns and restrictions. Annual growth in retail is now running at 10.7%.
  • The Australian wage price index rose by 0.6% in the 4th quarter to be up 1.4% over the year. The strong headline number partly reflects the unwinding of temporary pay reductions for some workers. Private sector wages grew by 0.7% whilst wages in the public sector grew by 0.3%.
  • Construction work done in the 4th quarter was weaker than expected with a fall of 0.9%. Annual growth is now running at 1.4%. 4th quarter details included building work rising by 0.6%, residential work done up 2.7%, while non-residential work fell by 2.4% to be down 4.5% over the year.
  • The volume of Australian capital expenditure rose by 3% in the 4th quarter, with mining investment falling by 1.5% and non-mining investment lifted by 4.9%. Northern Territory saw the strongest lift, following by TAS, NSW, and VIC, whilst QLD recorded a fall.
  • US Fed Chair Powell was sanguine about a recent jump in long-term government bond yields downplaying concerns over inflationary pressures and reiterated continued monetary support. He went on to say that the economic recovery was uneven and far from complete, adding that investors are mostly responding to an anticipated rebound as vaccine deployment curbs the spread of the virus.
  • US Treasury Secretary Janet Yellen said the US economy was still in a deep hole and President Biden’s US$1.9 trillion relief plan should not be reduced. She also said that infrastructure works were planned to boost the economy and would be paid for by higher taxes. Not good for corporates.
  • Minutes of the European central bank’s January meeting showed policymakers expressing fresh concerns over the strength of the euro currency but appeared relaxed over the recent rise in government yields.
  • European central bank President Lagarde said the bank was closely monitoring rising borrowing costs (ie. bond yields), which could point towards future central bank intervention in debt markets. The US central bank is likely contemplating the same move. Both are hoping that the pace at which bond yields have recently risen starts to abate (ie. less selling pressure) and/or private investors start buying government bonds given the attractively higher yields. If the private buying is not enough, the central banks will be forced to up their bond buying programs.

Politics:

  • With the “green” energy push in full-flight globally, the Australian National Party has called for a $10 billion clean-energy fund to invest in coal-fired power stations……the National Party wants to explore clean coal, carbon capture, and nuclear as options to assist with the transition away from fossil fuels given we can’t transition overnight. Elsewhere, a parliamentary committee has launched an inquiry after local banks and pension funds have been restricting support for coal, saying such steps could imperil key export industries and liking it to “corporate activism”.
  • Australia began its vaccine rollout this week with Prime Minister Scott Morrison receiving his first jab. The vaccinations will be made available in stages based on ranking of critical areas. There are no plans to make the vaccine compulsory in Australia but the health minister said it was critical that the community had confidence in the vaccine program. Vaccine take-up continues to be strong in the US, UK, and Israel, but appears too slow elsewhere in the world. Vaccine producer AstraZeneca told the European Union that it expects to deliver less than half the vaccines it was contracted to supply in the 2nd quarter. Johnson & Johnson’s one-dose vaccine moved closer to emergency use authorisation in the US.
  • US Democrats are pushing to quickly pass President Biden’s US$1.9 trillion stimulus bill before some key deadlines. A vote in the House could occur before the week is out which would see the Senate vote next week, testing the smaller majority the Democrats have in the House post the election and the slim control they have in the Senate. 


Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

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