Policy support remains in place while the global vaccination effort continues.
COVID-19 vaccine distribution within the United States has improved substantially since the early phases of the rollout. Certain restrictions and crowd limits are likely to remain in place for some time, but we believe an end to social distancing could be in sight by mid-summer 2021.
Wealthier nations have made more progress in vaccinating their populations, creating uneven vaccination rates around the world. We anticipate a more widespread global ramp-up, though progress will likely remain uneven.
Global economic activity appears set to accelerate, but vaccine distribution (or lack thereof), has contributed to diverging individual country growth expectations.
We believe the need for emergency fiscal policies and stimulus remains in most economies, though it should fade as the global economy reopens.
Monetary policy will likely remain highly accommodative in countries where inflation pressure remains low. We believe central banks like the Federal Reserve and European Central Bank should have the flexibility to remain focused on restoring labor market health.
We expect year-over-year inflation measures to spike over the next few months, due largely to base effects. We believe these sharp changes will be transitory in developed economies.
With company fundamentals set to improve, an upgrade cycle may lie ahead.
GOVERNMENT DEBT & POLICY
Treasury yields should drift rather than spike higher.
We believe quantitative easing, most notably the purchase of $80 billion of US Treasurys per month, is likely to continue through the latter half of 2021.
The Fed vowed to look through anticipated above-trend year-over-year economic data during the second quarter, which will be compared to levels at the depths of the downturn.
When the Fed is ready to move away from ultra-accommodative policy, we think one of its first moves will be tapering asset purchases. Embarking on a new rate-hiking cycle is a separate policy decision that may not materialize until mid-2023 or later.
We believe the front end of the US yield curve is likely to remain anchored for the foreseeable future, but 5- to 30-year yields are likely headed higher. We view rising rates as a positive sign of cyclical improvement within the domestic economy.
With the recent move off pre-pandemic lows behind us, we believe US rates will trend higher at a much slower pace. Rates in developed Europe may trend higher too, but likely at a pace that is commensurate with less-robust growth in that region.
Rising US Treasury yields tend to represent a headwind for sovereign and local-currency emerging market bonds. However, we expect the asset class to remain resilient as the global economy recovers.
Idiosyncratic factors will likely drive foreign currency performance.
The global bull market is still young.
It’s too soon to remove accommodative policies.
ASSET CLASS OUTLOOK
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