Market Development: During the final days of the year, the markets welcomed the agreement on two major deals. In Europe, the UK and EU found a last-minute solution to Brexit, avoiding the expected no-deal exit. In the US, President Donald Trump, despite many misgivings, finally signed a $900 billion COVID stimulus package.
In December, the two major central banks continued to deliver ultra-dovish messages. The Fed confirmed its aim to maintain a zero rate policy to sustain the recovery and the ECB increased the size of its PEPP program by $500 billion. In the bond market, the 10Yr US Treasury yield remained fairly static, staying below 1% while the 30Yr inflation breakeven reached 2%. During the month, the behaviour of the fixed-income market has been primarily driven by three major topics: the evolution of COVID and the arrival of the vaccines; inflation fears and the final composition of the Senate. The decline of the US Dollar was also a major topic, leading the behaviour of emerging markets among other things.
Our outlook continues to be focused on the macroeconomic situation (including growth and inflation), central banks’ behaviour and the evolution of equity markets.
At the same time, the COVID pandemic spreading into Europe and not decreasing in the US is still a major concern, despite the arrival of the vaccines (which has been offset by the appearance of a new variant of COVID in the UK). Inflation risk should remain subdued in the US and nil in Europe in the coming months, but inflation fears could continue to be a major source of concern. Global growth is expected to stabilize in the coming months in Asia, Europe and the US, should the COVID crisis gradually decrease.
In the US, the Treasury yield curve could continue to steepen slightly but Fed purchases and strong demand for safe-haven assets should stabilize long-term yields at low levels.
We believe that considering long-term inflation expectations, significant exposure to the US inflation protection securities (30Yr TIPS) will continue to be one of the main pillars of our strategy, anticipating higher breakeven expectations during the coming weeks or months.
In Europe, we feel that the ECB (and to a lesser extent the BoE) should implement new ultra-accommodative programs in order to combat the damage caused by the pandemic. We believe some high-quality emerging markets could offer investment opportunities, driven by demand and by the weakness of the US Dollar.
As a result, we are of the opinion that the best strategy today is to invest in a selection of high-quality corporate bonds, both in EUR and USD, favouring hybrid debt, in emerging markets and US real Treasury yields.
In December, we continued to favour credit spreads. We bought IBM 2029 and increased the weight of AstraZeneca 2029, at the expense of 10Yr Treasuries.
The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Fund as of 07/01/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.