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Monthly review - March 2021

one year ago



S&P 500




FTSE 100


CAC 40


DAX 30


BEL 20






 Source: Bloomberg 31.03.2021

Tech swings and roundabouts

After a high-flying year in 2020, as one of the key beneficiaries of global lockdowns, the tech sector has encountered a spell of turbulence. Recent stars, such as Tesla, Netflix and China’s internet giant Baidu, have had tough days. And that has knocked markets where these stocks are heavily weighted. As vaccine programmes roll out around the world, market focus has switched to economic rebound, bringing more cyclical sectors into the spotlight. But the longer-term growth story for these tech companies should remain intact, as the world adjusts to a post-pandemic ‘new normal’.

Patience under fire

The US Federal Reserve (Fed) took no action, despite the twin issues of rising bond yields and inflation that have historically triggered interest rate hikes. What has turned the heat up under the Fed? President Biden’s $1.9 trillion recovery stimulus was barely passed into law before plans fired up for a $3 trillion infrastructure package. And the target of 100 million Covid-19 vaccinations was hit in half the promised time. Both could fuel an overheating economy. But the Fed’s president remained cool, predicting a brighter economic outlook and interest rates locked close to zero.

Oil on troubled waters

Oil hit a volatile patch, as predictions of a third Covid-19 wave shook demand forecasts. After a torrid spell last spring, oil had staged a spectacular rally, rising over 60% since November. The surge was fuelled by reflation hopes after Biden’s election victory, combined with record OPEC production cuts. Oil giant Saudi Aramco succeeded in sounding an optimistic note, despite huge losses. But an end to the rally could spell disaster for smaller US oil companies, who have raised record sums in the bond markets this year, while teetering on the brink of collapse.

Close Look - hero image March 2021


The US Treasury bond yield curve is sometimes given the qualities of a crystal ball, predicting the path of economic growth, inflation and interest rates. But what is this curve and can it really map out the future? We take a look at how the yield curve is drawn, what that picture represents and whether these mystic powers stack up in reality.

First a step back. Governments issue bonds as a way of financing their investments. The bond or loan will be repaid over a fixed period, depending on the scale of the project, or the interest rate the government wishes to pay. The time frame could be as short as 3 months, or as long as 30 years. The interest rate on a short-dated bond is typically low. A longer dated bond pays a higher rate, rewarding investors for the risk that things might change over time.

A graph plotting the current interest rate or yield of a range of government bonds, from short to long dated, will normally show a steadily rising pattern. Join the dots and you’ve drawn a yield curve. But the shape of that curve is not set in stone, as the bonds are actively traded in a market. As the economic backdrop changes, the curve can look either steeper or flatter. And it’s that shape which gives a clue as to the market’s economic expectations, both good and bad.

In the years just before the pandemic, we saw a few episodes where the US yield curve moved away from its natural gentle rise, tipping downwards at the longer-dated end of the bond market. It’s known as an ‘inverted yield curve’. It looks uncomfortable and is often taken as a signal that growth in the future will be lower than growth today. Or even that the economy could tip into recession, ringing alarm bells in the equity markets.

This year the alarm has been raised by a steeper yield curve. Yields on long dated US bonds have risen very sharply, while short dated bond yields remain anchored close to zero. What does this tell us? One message is that US fiscal stimulus could cause the economy to overheat, fuelling inflation and forcing interest rates higher. A secondary message is that the Fed plans to finance the recovery with ultra-low interest rates. All may be open to interpretation, but what’s crystal clear is that the Fed remains calm, happy to look through a temporary inflation spike to more normal times ahead.

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