Monthly Market Insights – February 2021

Mar 8, 2021

Stocks up, bonds crushed as reopening trade continues

Markets have been jittery about rising inflation ever since last November’s vaccine announcements. Sure enough, longterm government bond yields have creeped up since then, which has mostly benefitted cyclical stocks as they offer some degree of hedge during periods of moderate inflation. Then in just February alone, government bond yields climbed nearly three times as much as November and January.

This time, the rise in long-term yields was largely driven by rising real interest rates, and less so inflation expectations, which can start to pose a headwind for risk assets as costs of borrowing increase. Real rates typically rise as economic growth prospects improve. While it’s difficult to pinpoint the exact cause, a few things are apparent: vaccine logistics appear to be improving, central banks remain widely accommodative, and more stimulus cheques are coming.

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