Our economic outlook for the last few months has been that the rate of change in GDP and inflation should likely accelerate through the first half of 2021. As a result, there are three major market implications: a lower U.S. dollar, higher commodity prices, and higher interest rates. Those trends feed into other asset classes, specifically as growth/inflation sensitive assets outperform duration/defensive assets. One of these three major market implications that has recently accelerated is higher interest rates.
Across the developed world, there are many examples of 10-year interest rates moving steadily higher over the past few months, and the pace is starting to accelerate.
Source: Koyfin.
Source: Koyfin.
Source: Koyfin.
Source: Koyfin.
Much of the recent increase is likely tied to investors realizing that growth and inflation are set up to accelerate in the coming months. This rise in longer-term interest rates has occurred at a time when central banks remain quite active, serving as a reminder that markets set interest rates, not central banks.
Central banks can have an impact on short-term rates by setting a target for overnight rates and providing guidance on likely changes to that rate in the future. Short-term interest rates have not been increasing as much as 10-year rates (and have been declining in the U.S.) as central banks have reiterated that they do not plan to raise interest rates in the near future.
Source: Koyfin.
Source: Koyfin.
Source: Koyfin.
This is also reflected in the futures market, where the current expectations include zero hikes within the next year, one within the next two years, and another two hikes within the next three years.
Longer-term interest rates increasing more than short-term rates has led to a steepening of global yield curves.
Source: Koyfin.
Source: Koyfin.
Source: Koyfin.
The incoming growth and inflation for 2021 has been strong. Estimates for growth and inflation are likely going to be revised higher based on where GDP Nowcast models from the various federal reserve banks are trending and the rising inflation/commodity data.
Source: Hedgeye.
This will likely continue to move interest rates and yield curves higher over the next few months and prolong the trend of outperformance for assets that are positively correlated to inflation compared to those assets that are positively correlated to interest rates.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC
