Exposure rates of the Dorval Asset Management Range – 5th March 2021

The economic boom currently in the making is going hand in hand with a swift resteepening in the yield curves, particularly in the US.

The speed of this normalization of long-term yields – rather than the event in itself – is unsettling investors, along with the divergence between the US policy mix and the approach taken elsewhere in the world.


US labor market figures for February offered a preview of the effects of the economy reopening – albeit in a limited way for now – for sectors most affected by pandemic-related restrictions. This trend is set to gather pace over the months ahead with the vaccination program making swift progress and Covid-19-related hospitalizations now down considerably. The leisure and hotels sector still has a shortfall of four million jobs to make up before it revisits pre-crisis figures (cf. chart 1).


Jobs in the leisure and hotels/restaurants sector in the US

Millions of people


Long-term yields continue to tighten as a result of sound prospects for the job market quickly catching up its lag on the back of the vaccination program and the Biden administration’s $1.9trn rescue package, soon to be approved by Senate. The Fed is quite naturally unconcerned, and sees the surge as an indication that the economic outlook is firming up. Meanwhile, a response from the US central bank could be seen as overly expansionary at a time when some investors are voicing concerns about future inflation prospects.


The Fed’s very neutral position is bolstered by the fact that there are nigh on zero economic effects from the rise in Treasury note yields for now. Mortgage rates and corporate bond yields are still close to their all-time low, well short of figures at the start of 2020 (cf. chart 2).


Rates in the private sector remain very low in the US

30-year mortgage rate
Yields on corporate bonds (all ratings, Bloomberg/Barclays index)


The danger is obviously that this currently very flattering situation could deteriorate swiftly if the yield curve continues to steepen relentlessly. However, it is worth noting that the prospect of temporary pressure on consumer prices is already priced into inflation-linked Treasury bonds (cf. chart 3), with these markets projecting annual inflation of 2.5% over the next five years, ahead of the economist consensus for 2.2%. For the first time, these projections are higher than longer-term estimates, which seem to have stabilized at normal levels.



Bond markets price in uptick in US inflation, but long-term projections remain normal

10-year projected inflation / 5-year projected inflation
Difference between projected annual 5-year and 10-year inflation



The fact remains that the markets may have gone overboard, or that real rates (excluding inflation) could continue to climb, despite the Fed’s continued asset purchases. These uncertainties drag down the equity markets, as well as the currency markets, with the dollar no longer decreasing. This disparity between the US policy mix and the rest of the world tends to support the dollar, which could temporarily dent investor risk appetite. However, we can expect this asymmetry to be offset soon by the prospects of the economy opening up again in Europe and other areas across the world.


In our flexible portfolios, we cut back our equity exposure, while maintaining a positive stance. We also took profits on the recovery in northern Asia theme, after almost a year of strong showings.



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