Gob. Soberanos/Tesorerías
As expected, the Bank of England maintained the bank rate at 0.1% and kept the total target stock of asset purchases unchanged at its Thursday meeting. However, the central bank upgraded its growth outlook and now forecasts GDP to rise 7.25% in 2021 – up from…
Highlights Massive slack in the US labour market means that the current uplift in US inflation is highly likely to fade by the end of the year. On a long-term horizon, investors should own US T-bonds. Equity investors should fade the reflation trade… …and rotate into the unloved defensive sectors such as healthcare, consumer staples, and personal products. These sector preferences imply an overweight to developed markets (DM) versus emerging markets (EM). On a 6+ month horizon, overweight US T-bonds versus German bunds. Fractal trade shortlist: France versus Japan; corn versus wheat; timber; and building materials. Feature Chart of the WeekMillions Of People Have Dropped Out Of The US Labour Market The near 40 percent of Americans not in the labour market is the highest level in 50 years. Moreover, the exodus out of the labour market during the pandemic was on an unprecedented scale in the modern era. This means that we should treat the US unemployment rate with a huge dose of salt, because it does not include the millions of people that have dropped out of the labour market (Chart I-1). Even the headline 14 million plunge in the number of US unemployed is deceptive, because it is almost entirely due to the furloughed workers that have returned to their jobs (Chart I-2). Chart I-2Furloughed Workers Have Returned To Their Jobs... Worryingly, the additional 2 million ‘permanent unemployed’ has barely budged from its pandemic peak and the number of economically inactive stands 5.5 million higher (Chart I-3). Meanwhile, population growth is increasing the potential labour force. In combination, underemployment in the US labour market amounts to around 10 million people. Chart I-3...But The Numbers Of Permanent Unemployed And Inactive Remain Elevated To its credit, the Federal Reserve is acutely aware of this. Last week, Chair Jay Powell pointed out that: “We’re a long way from full employment, payroll jobs are 8.4 million below where they were in February of 2020…these were people who were working in February of 2020. They clearly want to work. So those people, they’re going to need help” Implicit is the Fed’s belief that the massive slack in the US labour market will keep structural inflation depressed. And that the coming increases in inflation will be short-lived. Travel And Hospitality Cannot Move The Inflation Needle Some people argue that pent-up demand for things that we couldn’t do under social restrictions – such as travel and eat out – will unleash a major inflation. The flaw in this argument is that these things account for a tiny part of the inflation basket. For example, airfares are weighted at a negligible 0.6 percent in the US consumer price index (CPI). Eating out at (full service) restaurants is weighted at just 3 percent. So, even if these prices were to surge, they would barely move the overall inflation needle. By far the biggest component in US inflation is rent of shelter, weighted at 33 percent in the CPI and 42 percent in the core CPI. By far the biggest component in US inflation is rent of shelter, weighted at 33 percent in the CPI and 42 percent in the core CPI. The lion’s share of rent of shelter is so-called ‘owner-equivalent rent’, weighted at 24 percent in the CPI and 30 percent in the core CPI.1 Owner-equivalent rent is the hypothetical cost that homeowners incur to consume their own home, obtained by surveying a sample of homeowners. In the US, this hypothetical cost tracks actual rents. So, we can say that the biggest driver of US inflation is rent inflation (Chart I-4). Chart I-4Owner-Equivalent Rent Inflation Tracks Actual Rent Inflation Rent inflation has consistently outperformed the rest of the inflation basket. Hence, to get overall inflation to a persistent 2 percent, rent inflation must get to 3 percent and stay there – meaning a persistent 1.5 percent higher than it is now (Chart I-5). Chart I-5Core Inflation At 2 Percent Requires Rent Inflation At 3 Percent What drives rent inflation? The answer is the permanent unemployment rate. This is because the ability to pay rent relies on the security of having a permanent job. Empirically, a one percent decline in the permanent unemployment rate lifts rent inflation by one percent (Chart I-6). Chart I-6A 1 Percent Decline In The Permanent Unemployment Rate Lifts Rent Inflation By 1 Percent Pulling this together, the US permanent unemployment rate needs to fall by about 1.5 percent for core inflation to reach the Fed’s target persistently. Put another way, most of the additional 2 million permanent unemployed need to find work. Yet history teaches us that this will take a long time. The Post-Pandemic Productivity Boom Will Be Disinflationary When an industry sheds millions of jobs in a recession, it tends to substitute that labour input permanently with a new productivity-boosting technology or strategy. For example, after the Great Depression the smaller craft-based auto producers shut down permanently, while those that had adopted labour-saving mass production survived. The result was a major restructuring of the auto productive structure. Another example was the ‘typing pool’, a ubiquitous feature of office life until the late 1990s. After the dot com bust, the wholesale roll-out of Microsoft Word wiped out these typing jobs. It takes years for excess labour to get fully absorbed into a post-recession economy. Hence, the flip side of a post-recession productivity boom is that displaced workers need to re-skill, or even change career – requiring a long time for the excess labour to get absorbed into the restructured economy. After the dot com bust, it took four years. After the global financial crisis, it took six years (Chart I-7). Chart I-7How Long Does It Take To Absorb The Permanent Unemployed? The post-pandemic experience will be no different. In fact, compared to a common-or-garden recession, the pandemic has accelerated wider-reaching changes to the way that we live, work, and interact. This means that it might take even longer for the economy to attain the central bank’s goal of ‘full employment.’ Again, to its credit, the Federal Reserve is acutely aware of this. As Jay Powell went on to say: “It’s going to be a different economy. We’ve been hearing a lot from companies looking at deploying better technology and perhaps fewer people, including in some of the services industries that have been employing a lot of people. It seems quite likely that a number of the people who had those service sector jobs will struggle to find the same job, and may need time to find work” In summary, elevated permanent unemployment will subdue rent inflation. And subdued rent inflation will constrain overall inflation once the current supply bottlenecks clear. On a long-term horizon, investors should own US T-bonds. Equity investors should fade the reflation trade, and rotate into the unloved defensive sectors such as healthcare, consumer staples, and personal products. These sector preferences imply an overweight to developed markets (DM) versus emerging markets (EM). US And European Inflation Will Converge US and European inflation rates are not measured on an apples-for-apples basis. European inflation excludes the largest component in the US inflation basket – owner-equivalent rent (OER). To repeat, OER is the hypothetical cost that homeowners incur to consume their own home. European statisticians do not like to include any hypothetical item in the inflation basket that does not have a market price. So, euro area inflation includes actual rents, but it excludes OER. On an apples-for-apples comparison, inflation rates in the US and the euro area have been near-identical for many years. This means that US core inflation has a 30 percent higher weighting to an item that has persistently inflated at well above 2 percent. If we strip out OER, then the core inflation rates in the US and the euro area have been near-identical for many years (Chart I-8).2 Chart I-8On An Apples-For-Apples Comparison, Inflation In The US And Euro Area Are Near-Identical Alternatively, what if we include OER in euro area inflation? Despite European rent controls, actual rents have persistently outperformed core inflation. Hence, OER would likely outperform by even more. We can infer that including OER would have lifted euro area inflation very close to US inflation (Chart I-9). Chart I-9Omitting Owner-Equivalent Rent Has Depressed Euro Area Inflation All of this may sound like a petty academic difference, but this petty academic difference has generated huge economic and political consequences. As OER has boosted inflation in the US versus Europe, US and euro area monetary policy have diverged much more than they should. Which means US and euro area bond yields have diverged much more than they should. Which has structurally weakened the euro. Which has spawned the near $200 billion trade surplus for the euro area versus the US. And all because of a petty academic difference! What happens next? If, as we expect, US shelter inflation remains depressed then the major difference between US and euro area inflation will vanish. Reinforcing this will be a catch-up in euro area growth as the delayed roll-out of vaccinations takes effect. On this basis, a stand-out opportunity on a 6+ month investment horizon is yield convergence between US T-bonds and German bunds. Overweight US T-bonds versus German bunds. Candidates For Countertrend Reversals Corn prices have surged on increased demand from China combined with supply shortages resulting from poor weather in Brazil. This has caused an odd divergence between corn and wheat prices, which is now susceptible to a sharp correction (Chart I-10). Chart I-10The Rally In Corn Versus Wheat Is Vulnerable To Reversal Likewise, timber prices have boomed on the back of increased housebuilding demand combined with supply bottlenecks. But as these bottlenecks clear and/or higher bond yields cool demand, the sector is vulnerable to an aggressive reversal given its fragile fractal structure (Chart I-11). Chart I-11Timber Prices Are Vulnerable To Reversal To play this, our first recommended trade is to short the Invesco Building and Construction ETF (PKB) versus the Healthcare SPDR (XLV), setting the profit target and symmetrical stop-loss at 15 percent (Chart I-12). Chart I-12Short Building And Construction (PKB) Versus Healthcare (XLV) Finally, within stock markets, the recent divergence of France versus Japan is highly unusual given that the two markets have near-identical sector compositions. This divergence has taken France versus Japan to the top of its multi-year trading range (Chart I-13). Chart I-13Short France Versus Japan Hence, our second recommended trade is to short France versus Japan (MSCI indexes), setting the profit target and symmetrical stop-loss at 4.8 percent. Dhaval Joshi Chief Strategist dhaval@bcaresearch.com Footnotes 1 The PCE has broadly similar weights as the CPI. 2 We have approximated the removal of OER by removing the whole shelter component. 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Highlights Chart 1Inflation Pressures Building As expected, base effects kicked in and pushed 12-month core PCE inflation from 1.37% to 1.83% in March. But a favorable comparison to last year’s depressed price level only explains part of inflation’s jump. Core PCE also rose at an annualized monthly rate of 4.4% in March, one of the highest readings seen during the past few years (Chart 1). Jerome Powell spoke about the Fed’s view of inflation at last week’s FOMC press conference and he reiterated that the Fed views current upward price pressures as transitory, the result of both base effects and temporary bottlenecks resulting from an economic re-opening where demand recovers more quickly than supply. Powell’s message is that the Fed won’t lift rates until the labor market returns to “maximum employment” and it won’t start tapering asset purchases until it sees “substantial further progress” toward that goal. Our view remains that the Fed will see enough improvement in the labor market to start tapering asset purchases in late-2021 or early-2022. It will also begin lifting rates before the end of 2022. As a result, we continue to recommend below-benchmark portfolio duration. Feature Table 1Recommended Portfolio Specification Table 2Fixed Income Sector Performance Investment Grade: Neutral Chart 2Investment Grade Market Overview Investment grade corporate bonds outperformed the duration-equivalent Treasury index by 13 basis points in April, bringing year-to-date excess returns up to +111 bps. The combination of above-trend economic growth and accommodative monetary policy supports positive excess returns for spread product versus Treasuries. At 149 bps, the 2/10 Treasury slope is very steep and the 5-year/5-year forward TIPS breakeven inflation rate sits at 2.26% – almost, but not quite, equal to the lower-end of the 2.3% - 2.5% range that the Fed considers “well anchored”. The message from these two indicators is that the Fed is not yet ready to turn monetary policy more restrictive. Despite the positive macro back-drop, investment grade corporate valuations are extremely tight. The investment grade corporate index’s 12-month breakeven spread is down to its 1st percentile (Chart 2). This means that the breakeven spread has only been tighter 1% of the time since 1995. The same measure shows that Baa-rated bonds have only been more expensive 2% of the time (panel 3). We don’t anticipate material underperformance versus Treasuries, but we see better opportunities outside of the investment grade corporate space. Specifically, we advise investors to favor both tax-exempt and taxable municipal bonds over investment grade corporates with the same credit rating and duration (see page 9). We also prefer USD-denominated Emerging Market Sovereign bonds over investment grade corporates with the same credit rating and duration (see page 8). Finally, the supportive macro environment means we are comfortable adding credit risk to a portfolio. With that in mind, we encourage investors to pick up the additional spread offered by high-yield corporates (see page 6). Table 3ACorporate Sector Relative Valuation And Recommended Allocation* Table 3BCorporate Sector Risk Vs. Reward* High-Yield: Overweight Chart 3High-Yield Market Overview High-Yield outperformed the duration-equivalent Treasury index by 70 basis points in April, bringing year-to-date excess returns up to +335 bps. In a recent report, we looked at the default expectations that are currently priced into the junk index and considered whether they are likely to be met.1 If we demand an excess spread of 100 bps and assume a 40% recovery rate on defaulted debt, then the High-Yield index embeds an expected default rate of 3.2% (Chart 3). Using a model of the speculative grade default rate that is based on gross corporate leverage (aka pre-tax profits over debt) and C&I lending standards, we can estimate a likely default rate for the next 12 months using assumptions for profit and debt growth. The median FOMC forecast of 6.5% real GDP growth in 2021 is consistent with 31% corporate profit growth. We also assume that last year’s debt binge will be followed by relatively weak corporate debt growth in 2021. According to our model, 30% profit growth and 2% debt growth is consistent with a default rate of 3.4%, very close to what is priced into junk spreads. Given that the large amount of fiscal stimulus coming down the pike makes the Fed’s 6.5% real GDP growth forecast look conservative, and the fact that the combination of strong economic growth and accommodative monetary policy could easily cause valuations to overshoot in the near-term, we are inclined to maintain an overweight allocation to High-Yield bonds. MBS: Underweight Mortgage-Backed Securities outperformed the duration-equivalent Treasury index by 11 basis points in April, bringing year-to-date excess returns up to +26 bps. The nominal spread between conventional 30-year MBS and equivalent-duration Treasuries tightened 5 bps in April. This spread remains wide compared to levels seen during the past few years, but it is still tight compared to the recent pace of mortgage refinancings (Chart 4). The conventional 30-year MBS option-adjusted spread (OAS) currently sits at 11 bps. This is considerably below the 51 bps offered by Aa-rated corporate bonds, the 33 bps offered by Agency CMBS and the 24 bps offered by Aaa-rated consumer ABS. All in all, the value in MBS is not appealing compared to other similarly risky sectors. In a recent report, we looked at recent MBS performance and valuation across the coupon stack.2 We noted that high coupon MBS have delivered strong excess returns versus Treasuries since bond yields troughed last August, while low coupon MBS have lagged (panel 4). This divergence occurred because the higher coupon securities are less negatively convex and thus their durations didn’t extend as much during the back-up in yields. Looking ahead, we recommend favoring 4% and 4.5% coupons and avoiding 2%, 2.5% and 3% coupons. The higher OAS and less negative convexity of those higher coupon securities will cause them to outperform in an environment of flat or rising bond yields. Lower coupon MBS only look poised to outperform in an environment of falling bond yields, which is not our base case. Chart 4MBS Market Overview Government-Related: Neutral The Government-Related index outperformed the duration-equivalent Treasury index by 6 basis points in April, bringing year-to-date excess returns up to +72 bps (Chart 5). Sovereign debt underperformed duration-equivalent Treasuries by 19 bps in April, dragging year-to-date excess returns down to +21 bps. Foreign Agencies outperformed the Treasury benchmark by 2 bps on the month, bringing year-to-date excess returns up to +34 bps. Local Authority bonds outperformed by 41 bps in April, bringing year-to-date excess returns up to +329 bps. Domestic Agency bonds outperformed by 5 bps, bringing year-to-date excess returns up to +19 bps. Supranationals outperformed by 3 bps, bringing year-to-date excess returns up to +16 bps. We recently took a detailed look at USD-denominated Emerging Market (EM) Sovereign valuation.3 We found that, on an equivalent-duration basis, EM Sovereigns offer a spread advantage over investment grade US corporates. Attractive countries include: Mexico, Russia, Indonesia, Colombia, Saudi Arabia, Qatar and UAE. We prefer US corporates over EM Sovereigns in the high-yield space where there is still some value left in US corporate spreads and where the EM space is dominated by distressed credits like Turkey and Argentina. Chart 5Government-Related Market Overview Municipal Bonds: Overweight Chart 6Municipal Market Overview Municipal bonds outperformed the duration-equivalent Treasury index by 17 basis points in April, bringing year-to-date excess returns up to +308 bps (before adjusting for the tax advantage). We took a detailed look at recent municipal bond performance and valuation in last week’s report and came to the following conclusions.4 First, the economic and policy back-drop is favorable for municipal bond performance. The recently passed American Rescue Plan includes $350 billion of funding for state & local governments, a bailout that comes after state & local government revenues already exceeded expenditures in 2020 (Chart 6). President Biden has also proposed increasing income tax rates. Though these increases may not pass before the 2022 midterm, the threat of higher tax rates could increase interest in municipal bonds. Second, Aaa-rated municipal bonds look expensive relative to Treasuries (top panel). Muni investors should move down the quality spectrum to pick up additional yield. Third, General Obligation (GO) and Revenue munis offer better value than investment grade corporates with the same credit rating and duration, particularly at the long-end of the curve. Revenue munis in the 12-17 year maturity bucket offer a before-tax yield pick-up versus corporates, while GO munis offer a breakeven tax rate of just 7% (panel 2). Fourth, taxable munis offer a yield advantage versus investment grade corporates (panel 3), one that investors should take advantage of. Finally, high-yield muni spreads are reasonably attractive relative to high-yield corporates, offering investors a breakeven tax rate of 19% (panel 4). Despite the attractive spread, we only recommend a neutral allocation to high-yield munis versus high-yield corporates since high-yield munis’ deep negative convexity makes the sector prone to extension risk if bond yields should rise. Treasury Curve: Buy 5-Year Bullet Versus 2/10 Barbell Chart 7Treasury Yield Curve Overview The Treasury curve bull-flattened in April, even as the economic data continued to surprise on the upside. The 2/10 Treasury slope flattened 9 bps to end the month at 149 bps. The 5/30 slope flattened 5 bps to end the month at 144 bps (Chart 7). As we showed in a recent report, the Treasury curve continues to trade directionally with yields out to the 10-year maturity point.5 Beyond 10 years, the curve has transitioned into a bear-flattening/bull-steepening regime where higher yields coincide with a flatter curve and vice-versa (bottom panel). For now, we are content to stick with our recommended steepener: long the 5-year bullet and short a duration-matched 2/10 barbell. However, we will eventually be close enough to an expected Fed liftoff date that the 5/10 slope will follow the 10/30 slope and transition into a bear-flattening/bull-steepening regime. When that happens, it will make more sense to either position in a steepener at the front-end of the curve (long 3-year bullet / short 2/5 barbell) or a flattener at the long-end of the curve (long 5/30 barbell / short 10-year bullet). We don’t yet see sufficient evidence of 5/10 bear-flattening to shift out of our current recommended position and into these new ones, and so we stay the course for now. TIPS: Overweight Neutral Chart 8TIPS Market Overview TIPS outperformed the duration-equivalent nominal Treasury index by 52 basis points in April, bringing year-to-date excess returns up to +394 bps. The 10-year and 5-year/5-year forward TIPS breakeven inflation rates rose 4 bps and 5 bps on the month, respectively. At 2.43%, the 10-year TIPS breakeven inflation rate is near the top-end of the 2.3% to 2.5% range that is consistent with inflation expectations being well anchored around the Fed’s target (Chart 8). Meanwhile, at 2.26%, the 5-year/5-year forward TIPS breakeven inflation rate is just below the target band (panel 3). This week, we are downgrading our TIPS allocation from overweight to neutral for two reasons. First, as noted above, long-maturity breakevens are consistent with the Fed’s target. The Fed has so far welcomed rising TIPS breakeven inflation rates, but it will have an increasing incentive to lean against them if they continue to move up. Second, TIPS breakevens and CPI swap rates are even higher at the front-end of the curve – the 1-year CPI swap rate is currently 2.93% – and there is a good chance that those lofty expectations will not be confirmed by the realized inflation data. In addition to shifting from overweight to neutral on TIPS versus nominal Treasuries, we also book profits on our inflation curve flattener trade (panel 4) and on our real yield curve steepener (bottom panel). The inflation curve will likely stay inverted, but it will have difficulty flattening further unless short-maturity inflation expectations move even higher. The real yield curve may continue to steepen as bond yields rise, but without additional inflation curve flattening it is better to position for that outcome along the nominal Treasury curve. ABS: Overweight Chart 9ABS Market Overview Asset-Backed Securities outperformed the duration-equivalent Treasury index by 4 basis points in April, bringing year-to-date excess returns up to +19 bps. Aaa-rated ABS outperformed by 4 bps on the month, bringing year-to-date excess returns up to +13 bps. Non-Aaa ABS outperformed by 2 bps on the month, bringing year-to-date excess returns up to +58 bps. The stimulus from last year’s CARES act led to a significant increase in household savings when individual checks were mailed last April. This excess savings has still not been spent and already the most recent round of stimulus is pushing the savings rate higher again (Chart 9). The large stock of household savings means that the collateral quality of consumer ABS is very high, with many households using their windfalls to pay down debt (bottom panel). Investors should remain overweight consumer ABS and should also take advantage of the high quality of household balance sheets by moving down the quality spectrum. Non-Agency CMBS: Neutral Chart 10CMBS Market Overview Non-Agency Commercial Mortgage-Backed Securities outperformed the duration-equivalent Treasury index by 44 basis points in April, bringing year-to-date excess returns up to +121 bps. Aaa Non-Agency CMBS outperformed Treasuries by 36 bps in April, bringing year-to-date excess returns up to +50 bps. Meanwhile, non-Aaa Non-Agency CMBS outperformed by 70 bps, bringing year-to-date excess returns up to +365 bps (Chart 10). Though returns have been strong and spreads remain attractive, particularly for lower-rated CMBS, we continue to recommend only a neutral allocation to the sector because of the structurally challenging environment for commercial real estate. Even with the economic recovery well underway, commercial real estate loan demand continues to weaken and banks are not making lending standards more accommodative (panels 3 & 4). Agency CMBS: Overweight Agency CMBS outperformed the duration-equivalent Treasury index by 38 basis points in April, bringing year-to-date excess returns up to +87 bps. The average index option-adjusted spread tightened 4 bps on the month and it currently sits at 33 bps (bottom panel). Though Agency CMBS spreads have completely recovered to their pre-COVID levels, they still look attractive compared to other similarly risky spread products. Stay overweight. Appendix A: Butterfly Strategy Valuations The following tables present the current read-outs from our butterfly spread models. We use these models to identify opportunities to take duration-neutral positions across the Treasury curve. The following two Special Reports explain the models in more detail: US Bond Strategy Special Report, “Bullets, Barbells And Butterflies”, dated July 25, 2017, available at usbs.bcaresearch.com US Bond Strategy Special Report, “More Bullets, Barbells And Butterflies”, dated May 15, 2018, available at usbs.bcaresearch.com Table 4 shows the raw residuals from each model. A positive value indicates that the bullet is cheap relative to the duration-matched barbell. A negative value indicates that the barbell is cheap relative to the bullet. Table 4Butterfly Strategy Valuation: Raw Residuals In Basis Points (As Of April 30TH, 2021) Table 5 scales the raw residuals in Table 4 by their historical means and standard deviations. This facilitates comparison between the different butterfly spreads. Table 5Butterfly Strategy Valuation: Standardized Residuals (As Of April 30TH, 2021) Table 6 flips the models on their heads. It shows the change in the slope between the two barbell maturities that must be realized during the next six months to make returns between the bullet and barbell equal. For example, a reading of 47 bps in the 5 over 2/10 cell means that we would only expect the 5-year to outperform the 2/10 if the 2/10 slope steepens by more than 47 bps during the next six months. Otherwise, we would expect the 2/10 barbell to outperform the 5-year bullet. Table 6Discounted Slope Change During Next 6 Months (BPs) Appendix B: Excess Return Bond Map The Excess Return Bond Map is used to assess the relative risk/reward trade-off between different sectors of the US bond market. It is a purely computational exercise and does not impose any macroeconomic view. The Map’s vertical axis shows 12-month expected excess returns. These are proxied by each sector’s option-adjusted spread. Sectors plotting further toward the top of the Map have higher expected returns and vice-versa. Our novel risk measure called the “Risk Of Losing 100 bps” is shown on the Map’s horizontal axis. To calculate it, we first compute the spread widening required on a 12-month horizon for each sector to lose 100 bps or more relative to a duration-matched position in Treasury securities. Then, we divide that amount of spread widening by each sector’s historical spread volatility. The end result is the number of standard deviations of 12-month spread widening required for each sector to lose 100 bps or more versus a position in Treasuries. Lower risk sectors plot further to the right of the Map, and higher risk sectors plot further to the left. Chart 11Excess Return Bond Map (As Of April 30TH, 2021) Ryan Swift US Bond Strategist rswift@bcaresearch.com Footnotes 1 Please see US Bond Strategy Weekly Report, “That Uneasy Feeling”, dated March 30, 2021. 2 Please see US Bond Strategy Weekly Report, “A New Conundrum”, dated April 20, 2021. 3 Please see US Bond Strategy Weekly Report, “Searching For Value In Spread Product”, dated January 26, 2021. 4 Please see US Bond Strategy Weekly Report, “Making Money In Municipal Bonds”, dated April 27, 2021. 5 Please see US Bond Strategy Weekly Report, “The Fed Looks Backward While Markets Look Forward”, dated March 23, 2021.
Highlights Sweden’s economic recovery is robust and will deepen. Policy is accommodative. Very few advanced economies will benefit as much from the global economic rebound. The labor market will tighten, capacity utilization will increase, and inflation will rise faster than the Riksbank forecasts. On a one- to two-year investment horizon, the SEK is a buy against both the USD and the EUR. Despite their pronounced outperformance, Swedish stocks possess significantly more upside against both Eurozone and US equities over the remainder of the cycle. Swedish industrials will beat their competitors in both these markets. Nonetheless, China’s policy tightening creates a meaningful tactical risk, which selling Norwegian stocks can hedge. Italy’s fiscal plan constitutes a new salvo in Europe’s efforts to avoid last decade’s mistakes. Feature Last week, the Swedish Riksbank did not follow in the footsteps of the Norges Bank. The Swedish central bank acknowledged that the economy is performing better than anticipated and that the housing market is gaining in strength; yet, it refrained from hinting at any forthcoming adjustment to its policy rate or the pace of its asset purchase program. The positive outlook for the Swedish economy will force the Riksbank to tighten policy significantly before the ECB. As a result, we expect the Swedish Krona to outperform the euro and the US dollar. Moreover, investors should continue to overweight Swedish equities due to their large exposure to industrials and financials, even if they have already significantly outperformed the Euro Area. Sweden’s Economic Outlook The Swedish economy will accelerate, which will put pressure on resource utilization and fan inflationary risk in the years ahead. The degree of stimulus supporting Sweden is consequential. Chart 1A Dual Labor Market On the fiscal front, the government support measures that have been announced since the beginning of the COVID-19 crisis currently amount to SEK420bn, or SEK197bn for 2020 (4% of GDP), and SEK223bn for 2021 (4.5% of GDP). Moreover, generous labor market protection and part-time employment schemes meant that the number of employees in permanent employment contracts remained stable during the pandemic (Chart 1). Thus, the bulk of the rise in Swedish unemployment came from workers on fixed-term contracts. Monetary policy remains very accommodative as well. The Riksbank left its repo rate unchanged at 0% through the crisis, but cut its lending rate from 0.75% to 0.1%. More importantly, the Swedish central bank is aggressively injecting liquidity into the economy. It set up a SEK500bn funding-for-lending facility in order to incentivize bank lending to the nonfinancial private sector, and started a SEK700bn QE program, which as of Q1 2021 had purchased SEK380bn securities and which will purchase another SEK120bn in Q2, with covered bonds issued by banks accounting for 70% of it. As a result, the amount of securities held on the Riksbank balance sheet will nearly triple by year end (Chart 2). Chart 2The Riksbank Is Open For Business Beyond the monetary and fiscal stimulus, many factors point to greater economic strength for Sweden. Despite a slow start to the process, as of last week, nearly 30% of the Swedish population had received at least one vaccine dose, which is broadly in line with vaccination rates prevalent in France or Germany. Crucially, the pace of vaccination is accelerating at a rate of 13% per week. Even if this second derivative slows, more than 70% of the population will have received at least one dose by this summer. Thus, greater mobility is in the cards during the second quarter, which will boost household spending. Chart 3The Wealth Effect The housing market also favors a pick-up in consumption. The HOX housing price index is growing at a 15% annual rate, its fastest expansion in over 5 years. As a result of the wealth effect, this rapid appreciation is consistent with a swift improvement in the growth rate of household expenditures (Chart 3). Moreover, spending on durable goods now stands 1.3% above its pre-pandemic levels, while spending on non-durables is back to pre-pandemic levels. This context suggests that increased mobility translates into greater spending. The industrial sector remains a particularly bright spot in the Swedish economy. Sweden is extremely sensitive to the global industrial and trade cycle, because exports represent 45% of GDP. Moreover, the highly cyclical intermediate and capital goods comprise 56% of the country’s foreign shipments, which accentuates the beta of the Swedish economy. BCA Research remains optimistic about the global industrial cycle. Sweden will reap a significant dividend. Already the Swedish PMI points to stronger industrial production, and the index’s exports component is roaring ahead (Chart 4). The potential for a greater uptake in consumption, capex, and durable goods spending in the rest of the EU (Sweden’s largest trading partner) bodes well for the Swedish manufacturing sector. Additionally, if the collapse in the US inventory-to-sales ratio is any indication for the rest of the world, a global restocking cycle is forthcoming, which will further boost Swedish industrial activity (Chart 4, bottom panels). Finally, global public infrastructure plans are on the rise, which will also help Sweden. Chart 4Sweden Is well Placed Chart 5Brightening Labor Market Prospects In this context, the Swedish labor market should tighten significantly in the approaching quarters. Already, job vacancies are rebounding, and redundancy notices have normalized, which matches both the GDP growth surprise in Q1 and the continued rise in the NIER Sweden Economic Tendency Indicator. Furthermore, the employment component of the PMIs stands at 58.9 and is consistent with a sharp improvement in job growth over the coming year (Chart 5). The expected labor market growth will contribute to an increase in capacity utilization, which will place upward pressure on wages and inflation. When the 12-month moving average of US and Eurozone imports rises, so does the Riksbank Resource Utilization Indicator, because global trade has such a pronounced effect on the Swedish economy (Chart 6). Meanwhile, greater resource utilization leads to accelerated inflation, greater labor shortages, and rising unit labor costs (Chart 7). Chart 6CAPU Will Rise Chart 7The Coming Pressure Buildup Bottom Line: As a result of generous stimulus and the global economic recovery, the Swedish economy is set to continue its rebound. Consequently, employment and capacity utilization will improve meaningfully, which will lead to a resurgence of inflation and wages in the coming 24 months. Investment Implications On a 12 to 24 months horizon, we remain positive on the Swedish krona and Swedish equities. Fixed Income And FX Chart 8Three Hikes By 2025 The backend of the Swedish OIS curve only discounts 75bps of hikes by 2025. This pricing is too modest (Chart 8). The Swedish economy will rebound further as the vaccination campaign advances, and rising house prices and household indebtedness will fan growing long-term risk to financial stability, both of which suggest that the Riksbank will have to change its tack in 2022. The great likelihood that the Fed will start tapering off its asset purchase toward the end this year, that the ECB will follow sometime in 2022, and that the Norges Bank will be increasing interest rates next year will give more leeway to the Swedish central bank. A wider Sweden/Germany 10-year government bond spread is not an appealing vehicle to play a more hawkish Riksbank down the road. This spread hit a 23-year high in March and now rests at 62bps or its 98th percentile since 2000. Moreover, the terminal rate proxy embedded in the German money market curve is currently so low that the spread between Sweden’s and the Eurozone’s terminal rate proxy stands near a record high. Hence, German yields already embed much more pessimism than Swedish ones. Nonetheless, BCA recommends a below benchmark duration exposure within the Swedish fixed-income space, as we do for other government bond markets around the world.1 A bullish bias toward the SEK is a bet on the Riksbank that offers a very appealing risk/reward ratio, according to BCA Research’s Foreign Exchange Strategy strategists.2 The krona is very cheap against both the euro and the US dollar, trading at 9% and 29% discounts to purchasing power parity, respectively. Moreover, the Swedish current account stands at 5.2% of GDP, compared to 2.3% and -3.1% for the Euro Area and the US, creating a natural underpinning under the SEK. Chart 9The SEK Loves Growth Over the coming 12 to 24 months, cyclical forces favor selling EUR/SEK and USD/SEK on any strength. The SEK is one of the most cyclical G-10 currencies and has one of the strongest sensitivities to the US dollar. Hence, our positive global economic outlook and our FX strategists negative view on the greenback are synonymous with a weak USD/SEK. These same factors also mean that the krona will appreciate more than the euro, as the negative correlation between EUR/SEK and our Boom/Bust Indicator and global earnings growth illustrate (Chart 9). Equities We also like Swedish equities, but the state of the Swedish economy and the evolution of the Riksbank policy surprise have a limited impact on Swedish equities. The Swedish bourse is mostly about the evolution of the global business cycle. The Swedish benchmark heightened sensitivity to the global business cycle reflects its massive overweight in deep cyclicals, with industrials, financials, consumer discretionary, and materials accounting for 38.4%, 26.1%, 9.7% and 3.7% of the MSCI index respectively, or 78% altogether (Table 1). As a result, BCA’s preference for global cyclicals at the expense of defensives and this publication’s fondness for the recovery laggards like the industrial and financial sectors automatically translate into a favorable bias toward Sweden’s stocks.3 Table 1Mamma Mia! That’s A Lot Of Cyclicals Valuations offer a more complex picture, but they do not diminish our predilection for Sweden. Swedish equities trade at a discount to US stocks but at a premium to Euro Area ones (Chart 10). However, Swedish stocks offer higher RoEs and profit margins than both the US and the Euro Area, while also sporting lower leverage (Chart 11). Thus, their valuation premium to Euro Area stocks is warranted and their discount to US ones is excessive, especially when rising yields hurt the relative performance of the growth stocks that dominate US indexes. Chart 10Swedish Discounts And Premia Chart 11Profitable Sweden The outlook for Swedish earnings is appealing, both in absolute and relative terms. The Swedish market’s extreme sensitivity to global economic activity means that Sweden’s EPS increase and beat US profits when the Riksbank Resource Utilization Indicator expands (Chart 12). These relationships are artefacts of the Swedish economy’s pro-cyclicality, which causes capacity utilization to interweave tightly with the global business cycle (Chart 6). Chart 12The Winner Takes It All Chart 13Better Capex Play Than You Global capex and infrastructure spending favor Swedish equities compared to Euro Area ones. Over the past thirty years, Sweden’s stocks have outperformed those of the Eurozone when capital goods orders in the advanced economies have expanded (Chart 13). This reflects the Swedish benchmark’s large overweight in industrials, a sector that is the prime beneficiary of global capex. Capital goods orders are recovering well, and their growth rate can climb higher, especially as western multinationals announce capex plans and as governments from the US to Italy intend to ramp up infrastructure spending. Moreover, the large pent-up demand for durable goods in the Eurozone further enhances the potential of industrial firms, and thus, of Swedish equities.4 Chart 14Another Sign Of Pro-Cyclicality BCA Research’s positive cyclical stance on commodities offers another reason to overweight Sweden’s market relative to that of the US and the Euro Area. Our Commodity and Energy Strategy sister service anticipates significant further upside for natural resources, especially base metals, over the remainder of the business cycle.5 Commodity prices still have room to rally, because demand will grow as the global economy continues to recover and because the supply of natural resources has been constrained by a decade of low investment. As a result, rising metal prices will symptomatize strong economic activity around the world and will incentivize capex in commodity extraction, both of which will boost the revenue of industrial firms. Furthermore, commodity price inflation often corresponds with rising yields, which boosts financials as well. These relationships explain the Swedish stocks’ outperformance of US and Eurozone stocks, when natural resource prices rally, despite the former’s low exposure to materials (Chart 14). At the sector level, the appeal of Swedish industrials relative to those of the Eurozone and the US completes the rationale to favor Swedish equities in a global portfolio. Swedish industrials are just as profitable as US ones and are more so than Euro Area ones, while having significantly lower leverage than either of them (Chart 15). Additionally, for the past two years, the EPS growth of Swedish industrials has bested that of US and Eurozone ones. Yet, their forward P/E ratio trades in line with the US and the Euro Area, while the sell-side’s long-term relative earnings growth estimate is too depressed (Chart 16). The same observations are valid when comparing Swedish industrials to French or German ones. Hence, in the context of a global business cycle upswing, buying Swedish industrials while selling their US and Euro Area competitors is an appealing pair trade, especially since it also involves short USD/SEK and short EUR/SEK bets. Chart 15Attractive Swedish Industrials... Chart 16...And Not Expensive Despite our optimism toward Swedish stocks on a 12 to 24 months basis, investors must hedge a near-term risk. Chinese authorities are aiming to contain financial excesses and trying to restrain credit growth. As we showed four weeks ago, China’s excess reserve ratio is contracting, which points toward a slowdown in the Chinese credit impulse.6 Historically, such a development can hurt global cyclicals, and thus, also Swedish equities. However, BCA Research’s China strategists believe that Beijing will not kill off the Chinese business cycle; thus, the recent disappointment in the Chinese PMI is transitory.7 Chart 17Industrials vs Materials: Europe vs China Materials more than industrials will suffer the brunt of a China slowdown, as the re-opening trade and capex cycle among advanced economies will create a buffer for the latter. Indeed, the performance of global industrials relative to materials stocks correlates with the evolution of the spread between the Euro Area and Chinese PMI (Chart 17). Thus, we recommend selling Norwegian equities to hedge the tactical risk inherent in an overweight on Sweden. As Table 1 above shows, Norway overweighs materials and energy (two sectors greatly exposed to China), hence, a temporary pullback in commodity prices should hurt Norwegian stocks more than Swedish ones. Bottom Line: The SEK is an inexpensive and attractive vehicle to bet on both the global business cycle strength and the Swedish economic recovery. Thus, investors should use any rebound in EUR/SEK and USD/SEK to sell these pairs. Moreover, Swedish stocks greatly overweight cyclical sectors, particularly industrials and materials. This sectoral profile renders Swedish equities as attractive bets on the global economy. Additionally, Swedish shares display alluring operating metrics. As a result, we recommend investors go long Swedish industrials relative to those of the US and Euro Area. They should also overweight Swedish equities against the US and the Eurozone. Consequent to some China-related tactical risks, an underweight stance on Norwegian stocks constitutes an attractive hedge to this Swedish exposure. A Few Words On Italy’s National Recovery And Resilience Plan Mario Draghi’s plan to revive the Italian economy, announced last week, is an important marker of Europe’s changing relationship with fiscal policy. Last decade, excessive austerity contributed to subpar growth, ultimately firing up concerns about debt sustainability in many peripheral economies, and fueled risk premia in Italy and Spain. Under the cover of the current crisis, and in the face of the changing political winds in Brussel and Berlin where fiscal rectitude is not the mantra it once was, national European governments are beginning to propose ambitious fiscal stimulus plans. The National Recovery and Resilience program illustrates these dynamics. The EUR248bn plan is a testament to the importance of the NGEU recovery program as well as the REACT EU recovery fund. Through these facilities, the EU will contribute EUR191.5bn to the fiscal plan via grants and loans. Italy will contribute the remainder of the funds. While the total amount disbursed over the next six years corresponds to 14% of Italy’s 2019 GDP, the Draghi government estimates that the program will add 3.2 percentage points to GDP between 2024 and 2026. Importantly, markets are not rebelling. Despite expectations that Italy would continue to run an accommodative fiscal policy, the BTP/Bund spreads remain stable. We can expect this trend of greater stimulus to be mimicked around the EU. Spain is another large recipient of the NGEU program, and it too is likely to increase stimulus beyond what the EU will fund. France will hold an election in May 2022, and President Macron has all the incentives to stimulate the economy between now and then. If, as we wrote last week, Germany shifts to the left in September, then this outcome will be guaranteed. Bottom Line: The Draghi plan is the first salvo of greater fiscal stimulus in the EU. This trend will help Eurozone growth improve relative to the US over the coming few years. Despite a loose fiscal policy, BTPs and other peripheral bonds will continue to outperform on the back of declining risk premia. Mathieu Savary, Chief European Investment Strategist Mathieu@bcaresearch.com Footnotes 1Please see Global Fixed Income Strategy “GFIS Model Bond Portfolio Q1/2021 Performance Review & Current Allocations: Grand Reopening,” dated April 6, 2021, available at gfis.bcaresearch.com 2Please see Foreign Exchange Strategy “2021 Key Views: Tradeable Themes,” dated December 4, 2020, available at fes.bcaresearch.com 3Please see European Investment Strategy “Summer Of ‘21,” dated March 22, 2021, available at eis.bcaresearch.com 4Please see European Investment Strategy “Winds Of Change: Germany Goes Green,” dated April 23, 2021, available at eis.bcaresearch.com 5Please see Commodity & Energy Strategy “Industrial Commodities Super-Cycle Or Bull Market?” dated March 4, 2021, available at ces.bcaresearch.com 6Please see European Investment Strategy “The Euro Dance: One Step Back, Two Steps Forward,” dated March 29, 2021, available at eis.bcaresearch.com 7Please see China Investment Strategy “National People’s Congress Sets Tone For 2021 Growth,” dated March 17, 2021, available at cis.bcaresearch.com Cyclical Recommendations Structural Recommendations Currency Performance Fixed Income Performance Government Bonds Corporate Bonds Equity Performance Major Stock Indices Geographic Performance Sector Performance Closed Trades
Highlights Developed economies continue to transition towards a post-pandemic state. Europe has further to go, but it is lagging the US at a constant rate and is thus merely delayed – not on a different path. This ongoing transition is also reflected in the global macro data, which continues to surprise to the upside. Widespread optimism about the outlook for economic activity and earnings over the coming year has led some investors to ask whether an imminent peak in the rate of growth could be a potentially negative inflection point for richly valued risky asset prices. Using our global leading economic indicator as a guide, we find that a peak in growth momentum in and of itself is not likely to be enough of a catalyst for meaningful risky asset underperformance versus government bonds. A sizeable shock to sentiment would likely be required, causing either a very serious growth slowdown, outright fears of recession, or some other event that negatively impacts earnings growth or raises the equity risk premium (“ERP”). We can identify several candidates for such a shock, including the emergence of new, vaccine-resistant variants of COVID-19, the impact of higher taxes on earnings, overtightening in China, and a potentially hawkish shift in monetary policy in the developed world. But none of these risks individually appears to be likely enough to warrant reducing cyclical portfolio exposure. We continue to expect positive absolute single-digit returns from stocks over the coming 6-12 months, and would recommend that investors remain overweight stocks versus bonds in a multi-asset portfolio. We remain overweight global ex-US equities vs. the US, but expect that euro area stocks will have to do the heavy lifting, driven either by the underperformance of global technology stocks or the outperformance of euro area financials. Within a fixed-income portfolio, we recommend a modestly short duration stance, but do so primarily on a risk-adjusted basis. Feature Chart I-1Europe Is Behind The US, But On The Same Path Over the past month, developed economies have continued to transition towards a post-pandemic state. While the number of new confirmed COVID-19 cases remains relatively high on a per capita basis in the US and Europe, there continues to be significant progress on the vaccination front in all Western advanced economies. Europe continues to lag the US and the UK in terms of the share of the population that has received at least one dose of vaccine, but Chart I-1 highlights that the gap has remained constant at approximately six weeks (to the US). Panel 2 of Chart I-1 highlights that the US and UK both experienced either falling or a stable number of new cases once the number of first doses reached current European levels; Israel required significant further gains in the breadth of vaccinations before it altered COVID-19’s transmission dynamics in that country, but this appears to have occurred because of a much higher pace of spread earlier this year. The negative impact on advanced economies from reduced services activity is strongly linked to pandemic control measures (such as stay-at-home orders, curfews, forced business closures, etc). We have argued that, outside of the US, the implementation and removal of these measures is being driven by the impact of the pandemic on the medical system, rather than the sheer number of new cases and deaths. Chart I-2 highlights that, based on this framework, Europe still has further to go – current per capita hospitalizations remain much higher in France and Italy than in the US, UK, or Canada. But the nature of the disease means that hospitalizations begin to fall even if case counts remain relatively stable, and fall rapidly once new cases trend lower. Given the steady gains that European countries are making in providing first vaccine doses to their populations, it seems likely that hospitalizations there will peak sometime in the coming four to six weeks. This underscores that Europe is not on a different path than that of the US, it is simply further behind in the process (and will ultimately catch up). The transition towards a post-pandemic state is also reflected in the global macro data, which continues to positively surprise in all three major economies (Chart I-3). In Europe, the April services PMI rose back above the 50 mark, April consumer confidence surprised to the upside, and February retail sales came in better than expected (Table I-1). In the US, the March services PMI was also very strong, the labor market continued to meaningfully improve, and several measures of inflation surprised to the upside. Chart I-2Euro Area Hospitalizations Remain High, But Will Soon Decline Chart I-3The Macro Data Continues To Positively Surprise Table I-1Services PMIs And The Labor Market Continue To Meaningfully Improve Chart I-4China's Current Contribution To Global Demand Is Strong In China, the recent tick higher in the surprise index likely reflects the recognition of some data series whose release was delayed due to the Chinese New Year, as well as significant base effects (compared with Q1 2020) in many data series recorded in year-over-year terms. On a quarter-over-quarter basis, Chinese economic activity decelerated last quarter to 0.6% from the upwardly revised 3.2% in Q4 2020 – which was below the anticipated 1.4% q/q. Still, Chinese RMB-denominated import growth closely matches (lagging) data on global exports to China (in US$ terms), with the former suggesting that China’s current contribution to global external demand remains strong (Chart I-4). This is also consistent with rising producer prices, which had fallen back into deflationary territory last year (panel 2). Peaking Growth Momentum: Should Investors Be Worried? The continued increase in the number of vaccine doses administered, positive data surprises, and bullish global growth forecasts for this year have understandably led to extremely optimistic investor sentiment. It has also naturally raised the question of “what could go wrong?”, with some investors pointing to an imminent peak in the rate of growth as a potentially negative inflection point for richly valued risky asset prices. Chart I-5 addresses this question by examining 12 episodes of waning growth momentum since 1990, defined as an identifiable peak in our global leading economic indicator. Panel 2 shows the 12-month rate of change in the relative performance of global equities versus a US$-hedged 7-10 year global Treasury index. Chart I-5Is Peaking Growth Momentum A Risk For Stocks? At first blush, the chart does support the notion that a peak in growth momentum is generally negative for risky asset prices. The subsequent 12-month relative return from stocks versus bonds following a peak in the LEI has been negative in 8 out of the 12 episodes, suggesting that the risks of an equity correction are currently quite elevated. However, there is more to the story than this simple calculation implies (Table I-2). First, two of the twelve episodes saw the global LEI peak in the context of an eventual US recession, so it is not surprising that stocks underperformed bonds in those episodes. Second, out of the six non-recessionary episodes, only two of them involved significant underperformance, in 2002 and in 2015. Table I-2Peak Growth Momentum Is An Insufficient Catalyst For Equity Underperformance US equities underperformed in the former case because of the persistently damaging impact of corporate excesses that built up during the dot-com bubble, and predominantly global ex-US equities underperformed bonds in the latter case because of a combination of the significant impact on global CAPEX from the 2014 dollar and oil price shock, as well as a major decline in global bond yields. In the four other non-recessionary examples of equity underperformance, stocks only modestly underperformed bonds, and often this occurred in the context of significant events: surprising Fed hawkishness in 1994, the Asian financial crisis in 1997, a major slowdown in China in 2013, and the combination of a domestically-driven Chinese economic slowdown coupled with the Sino/US trade war in 2017/2018. The key point for investors is that a peak in growth momentum is in and of itself not enough of a catalyst for meaningful risky asset underperformance versus government bonds. A sizeable shock to sentiment would likely be required, causing either a very serious growth slowdown, outright fears of recession, or some other event that negatively impacts earnings growth or raises the equity risk premium (“ERP”). What Else Could Go Wrong? There are four other plausible risks that we can identify to a bullish stance towards risky assets over the coming 6-12 months. We discuss each of these risks below. New COVID-19 Variants Chart I-6 highlights that bottom up analysts expect global earnings per share to be 12% higher than their pre-pandemic level in 12-months’ time. This expectation is driven by extraordinarily easy fiscal and monetary policy, but also the view that vaccination against COVID-19 will allow social distancing policies to end and services activity to fully recover. However, as India is clearly – and tragically – demonstrating at present, the emerging world is lagging in terms of vaccinating its population. India’s per capita case count has soared (Chart I-7), which is surprising given that the country’s COVID-19 infection rate has been significantly below that of more advanced economies over the past year. It is therefore likely that India’s case count explosion is due to new variants of the disease, and periodic outbreaks in less developed countries – as well as vaccine hesitancy in more developed economies – risks the emergence of even newer variants that may be partially or substantially vaccine-resistant. Chart I-6Earnings Expectations Already Price In A Normalization In Services Activity Chart I-7India's COVID-19 Situation Is Tragic, And Concerning New variants of COVID-19 may prove to be less deadly, but the economic impact of the pandemic has come mainly from its potential to collapse the medical system via high rates of serious illness requiring hospitalization, not strictly from its lethality. As such, potentially new vaccine-resistant variants of the disease resulting in similar or higher rates of hospitalization pose a risk to a bullish economic outlook. Taxation Both corporate and individual tax rates are set to rise in the US over the coming 12-18 months which, at first blush, could certainly qualify as a non-recessionary event that negatively impacts earnings or raises the ERP. Corporate taxes are set to rise first as part of the American Jobs Plan, which our political strategists have argued will probably take the Biden administration most of this year to pass. The plan involves a proposed increase in the domestic corporate income tax rate to 28% from 21%, a higher minimum tax on foreign profits, and a 15% minimum tax on “book income”. In addition, as part of the American Families Plan, Biden is proposing to increase the top marginal income tax rate for households earning $400,000 or more to 39.6% (from 37%), and to substantially increase the capital gains tax rate for those earning $1 million or more from a base rate of 20% to 39.6%. The 3.8% tax on investment income that funds Obamacare would be kept in place, which would bring the total capital gain tax rate to 43.4% for that income group. Peter Berezin, BCA’s Chief Global Strategist, made two points about higher corporate taxes in a recent report.1 First, he noted that the changes would likely result in an 8% decline in forward earnings if passed as currently proposed, but that various tax credits as well as opposition to a 28% corporate tax rate from Democratic Senator Joe Manchin would likely cap the impact at 5%. Second, he argued that the behavior of 12-month forward earnings and the performance of stocks that benefitted the most from President Trump’s corporate tax cuts suggest that very little impact from these changes has been priced in. Peter argued in his report that the effect of strong economic growth will likely offset the negative impact of higher taxes on earnings, and we are inclined to agree. Chart I-8 highlights that a 5% reduction in 12-month forward earnings would reduce the equity risk premium by roughly 20-25 basis points, which would not be disastrous on its own. Still, the fact that these changes have not been priced in means that corporate tax hikes could be a more meaningful driver of lower stock prices if the impact is ultimately larger than we currently expect or if the growth outlook suddenly shifts in a negative direction. In terms of changes to individual taxes, our sense is that the proposed increase in the capital gains tax rate is more significant than the modest proposed change to the top marginal income tax rate for higher-income households. For individuals earning $1 million or more, Chart I-9 highlights that the proposed change to the capital gains rate would bring it to the highest level seen since the late 1970s. Given the rich valuation of equities, it seems inconceivable that such a change would not trigger some short-term selling of equities to lock in long-term gains at lower tax rates. Chart I-8Higher Corporate Taxes Will Only Modestly Reduce the Equity Risk Premium Chart I-9Biden's Capital Gains Tax Proposal Would Lead To Some Selling Of Stocks... But like upcoming changes to corporate taxes, we see the potential for higher taxes on wealthy individuals as a risk to the equity market and not as a likely driver of stock prices over a cyclical time horizon. First, our political strategists see 50/50 odds that the American Families Plan will be passed this year, meaning that short-term tax avoidance selling may be postponed until 2022. In addition, Chart I-10 highlights that over the longer term, the relationship between the maximum capital gains tax rate and the ERP is weak or nonexistent. The chart highlights that the perception of a positive relationship rests entirely on the second half of the 1970s, when the maximum capital gains tax rate was between 30-40%. However, it seems clear from the chart that the stagflationary environment of that period was responsible for a high ERP, as the capital gains rate fell from 1977 to 1982 without any significant decline in risk premia. It took until the end of the 1982 recession and the beginning of the structural disinflationary period for the equity risk premium to decline, suggesting that there is effectively no relationship between the two (and therefore no reason to believe that higher capital gains taxes will lead to sustained declines in stock market multiples). Chart I-10…But The Effect Would Not Likely Last Overtightening In China Chart I-11Leading Indicators Of China's Economy Are Pointing Down, Not Up Even though Chart I-4 highlighted that Chinese import demand is currently strong, we expect China’s growth impulse to weaken in the second half of the year. Chart I-11 highlights that our leading indicator for China’s Li Keqiang index has done a good job of predicting Chinese import growth, and the indicator is now in a clear downtrend. Panel 2 presents the components of the indicator, and shows that all three are trending lower. Monetary conditions are potentially rebounding from extremely weak levels (due to past deflation and a rise in the RMB versus the US dollar and other Asian currencies), but money supply and credit measures are deteriorating. Leading indicators for China’s economy are deteriorating because Chinese policymakers have already tightened liquidity conditions in response to the country’s rebound from the pandemic and following a surge in the credit impulse. The 3-month repo rate returned to pre-pandemic levels in the second half of last year (Chart I-12), and consequently the private sector credit impulse (particularly that of corporate bond issuance) fell despite robust medium-to-long term loan growth. Chart I-12Chinese Interest Rates Have Already Returned To Pre-COVID Levels We noted in our January report that China’s credit impulse has consistently followed a 3½-year cycle since 2010, and this year has been no different. This cycle is not exogenous or mystical; it has been caused by the repeated “oversteering” of activity by Chinese policymakers who frequently oscillate between the need to fight deflation and the strong desire to curb additional private sector leveraging. Our base case view is that policymakers will not accidentally overtighten the economy, and that the credit impulse will settle somewhere between late 2019 levels and the peak rate reached in the latter half of last year. But the risk of significant oversteering cannot be ruled out, and will likely remain a downcycle risk for investors for several years to come. A Hawkish Shift In Monetary Policy In Developed Markets Last week the Bank of Canada announced that it would taper its pace of government debt purchases from 4 billion to 3 billion CAD per week. The announcement was noteworthy for many investors, as it suggested that asset purchase reductions could also be announced by the Fed and other major central banks by the end of the second or third quarter. Many investors are sensitive to the tapering question because of what transpired during the “Taper Tantrum” episode of 2013. During an appearance before Congress in late May of that year, then Chair Ben Bernanke stated that the Fed could “step down” the pace of its asset purchases in the next few FOMC meetings if economic conditions continued to improve. The result was that 10-year Treasurys fell roughly 10% in total return terms over the subsequent three-month period. While stocks rallied in response to the growth-positive implications of the move, this occurred from a much higher ERP starting point than exists today. The risk, in the minds of some investors, is that tapering today could thus lead to a correction in stock prices. There are two counterpoints to this view. First, bonds have already sold off meaningfully over the past several months in response to a significant improvement in the economic outlook, and investors already expect the Fed to raise interest rates earlier than it is publicly forecasting. It is thus difficult to see how an announcement of tapering from the Fed would significantly alter the outlook for monetary policy over the coming 6-18 months. Chart I-13Another Taper Tantrum-Like Selloff Would Necessitate Higher Expectations For R-star Second, it is notable that the “Taper Tantrum” began at yield levels at the front end of the curve that are roughly similar to what prevails today. 5-year/5-year forward bond yields stood at roughly 3% at the beginning of the “Tantrum”, compared with 2.3% today. Chart I-13 highlights how high forward bond yields would need to rise in order to generate another selloff of similar magnitude from 10-year Treasury yields (roughly 3.65%). In our view, a rise to this level over the coming year is essentially impossible without a major shift in investor expectations about the natural rate of interest. We highlighted the risk of such a shift in last month’s report,2 but for now it would likely necessitate hard evidence of little-to-no permanent damage to the labor market from the pandemic. This is not our base case view, but it will be an important possibility to monitor as the decisive end to social distancing and other pandemic control measures draws nearer. Investment Conclusions As noted above, there are several identifiable risks to a bullish outlook for risky assets, but none of these risks individually appear to be likely. Given this, we continue to expect positive absolute single-digit returns from stocks over the coming 6-12 months, and would recommend that investors remain overweight stocks versus bonds in a multi-asset portfolio. We favor value versus growth stocks, cyclical versus defensive sectors, and small versus large cap stocks, although there is more return potential over the coming year in value versus growth than the latter two positions. We also remain short the US dollar over a cyclical time horizon. Within a global equity portfolio, we remain overweight global ex-US equities vs the US, but this position has moved against us over the past two months. Chart I-14 highlights that global ex-US equities have given back all of their October – January gains versus US equities, most of which has occurred since late-February. The chart also highlights that all of this underperformance has been driven by emerging market stocks, as euro area equity performance has been mostly stable year-to-date. Chart I-15 highlights that EM underperformance has occurred both in the broadly-defined tech sector as well as when measured in ex-tech terms. To us, this suggests that EM stocks are responding to the deterioration in leading indicators for the Chinese economy that we noted above, which implies that they are not likely to lead global ex-US equity performance higher over the course of the year barring an imminent shift in Chinese policy. We continue to expect that euro area stocks will have to do the heavy lifting, driven either by the underperformance of global technology stocks or the outperformance of euro area financials – which are extremely cheap relative to US banks and have much further scope for earnings to normalize as the pandemic draws to a close. Chart I-14Emerging Markets Have Caused Global Ex-US Stocks To Underperform Chart I-15EM's Underperformance Has Been Broad-Based As a final point, investors should note that we are recommending a modestly short duration stance within a fixed-income portfolio, but that we make this recommendation primarily on a risk-adjusted basis. Chart I-16 highlights that Treasury market excess returns (relative to cash) have historically been driven by whether the Fed funds rate increases by more or less than what is currently priced into the market. Over the past 12 months, the Treasury index has very substantially underperformed cash without a hawkish surprise, and the rate path that is currently implied by the OIS curve is already more hawkish than the Fed is (for now) projecting. On this basis, a neutral duration stance could be justified, but we would still prefer a modestly short duration stance due to the risk of a potential increase in investor expectations for the neutral rate of interest late this year or in early 2022. Chart I-16Policy Rate Surprises Tend To Drive The Duration Call Jonathan LaBerge, CFA Vice President The Bank Credit Analyst April 29, 2021 Next Report: May 27, 2021 II. In COVID’s Wake: Government Debt And The Path Of Interest Rates The US fiscal outlook has deteriorated substantially over the past two decades, as a consequence of the fiscal response to both the global financial crisis and the COVID-19 pandemic. US government debt-to-GDP is now nearly as high as it was at the end of the Second World War, and is projected by the US Congressional Budget Office (CBO) to explode higher over the coming 30 years. Some investors argue that extreme levels of government debt now virtually guarantee that interest rates will remain structurally low, and we test this claim alongside a scenario that limits the projected rise in the primary deficit. We find that US fiscal reform, when it eventually occurs, will likely be negative for health care stocks. We also note that even in a scenario where the US limits the size of its future primary budget deficit, net interest outlays will likely rise to elevated levels compared to history. A comparison with the Canadian experience in the 1990s suggests a structurally negative outlook for the US dollar, from an overvalued starting point. Finally, we note that the US fiscal outlook does not necessarily prevent an increase in interest rates over the coming few years in a scenario where investors raise their expectations for the neutral rate of interest, a possibility that we discussed in last month’s report. This scenario is not our base case view, but it is plausible and should actively be monitored by investors over the coming one to two years. For now, we do not expect that rising interest rates pose a risk to stocks over the coming 6-12 months. Investors should remain cyclically overweight equities within a multi-asset portfolio, and should maintain a below-benchmark level of duration on a risk-adjusted basis. In 2001, US government debt held by the public as a share of GDP stood at 31.5%, after having fallen roughly 16 percentage points from early 1993 levels. Today, as a result of both the global financial crisis and the COVID-19 pandemic, the debt to GDP ratio has risen to a whopping 100%, and is projected to rise meaningfully higher over the coming decades. In this report we review the long-term US fiscal outlook in the wake of the pandemic, with a focus on the implications for interest rates. Some investors argue that extreme levels of government debt now virtually guarantee that interest rates will remain structurally low, and we test this claim alongside a scenario that limits the projected rise in the primary deficit. We find that US fiscal reform, when it eventually occurs, will likely be negative for health care stocks, whose fundamental performance has outstripped that of the broad equity market since the mid-1990s (reflecting pricing power that stands to be curtailed through regulation). We also note that even in a scenario where the US limits the size of its future primary budget deficit, net interest outlays will likely rise to elevated levels compared to history. A comparison with the Canadian experience in the 1990s suggests a structurally negative outlook for the US dollar, from an overvalued starting point. Finally, we note that the US fiscal outlook does not necessarily prevent an increase in interest rates over the coming few years in the hypothetical scenario that we described in last month’s report,3 i.e., an environment where the narrative of secular stagnation is challenged and investor expectations for the neutral rate rise closer to trend rates of economic growth. This scenario is not our base case view, but it is plausible and should actively be monitored by investors over the coming one to two years. For now, investors should remain cyclically overweight equities within a multi-asset portfolio, and should maintain a below-benchmark level of duration on a risk-adjusted basis. Debt Sustainability, And The CBO’s Baseline Projection When analyzing the US fiscal outlook, the Congressional Budget Office’s Long-Term Budget Outlook report is typically the reference point for investors. The report provides annual projections for the budget deficit and the debt-to-GDP ratio for the next three decades, as well as a breakdown of the projected deficit into its primary (i.e., non-interest) and net interest components. Charts II-1 and II-2 present the most recent baseline projections from the CBO, which clearly present a dire long-term outlook. The deficit and debt-to-GDP ratio are projected to be relatively stable over the next decade, but explode higher over the subsequent 20 years. In 2051, the CBO’s baseline projects that the budget deficit will be roughly 13% of GDP, with net interest costs accounting for approximately two-thirds of the deficit. Chart II-1The CBO’s Fiscal Outlook Is Extremely Negative Chart II-2In 2051, The CBO Projects A 13% Annual Budget Deficit In order to understand what is driving the CBO’s dire long-term budget and debt forecast, it is important to review the government debt sustainability equation shown below. The equation highlights that the change in a government’s debt-to-GDP ratio is approximately equal to 1) the primary deficit plus 2) net interest costs as a share of GDP, the latter being defined as the product of last year’s debt-to-GDP ratio and the difference between the average interest rate on the debt and the rate of GDP growth. Δ Debt-To-GDP Ratio ≈ Primary Deficit As A % Of GDP4 + (r-g)*(Prior Period Debt-To-GDP Ratio) Where: r = Average interest rate on government debt and g = Nominal GDP growth The equation highlights that expectations of a persistently rising debt-to-GDP ratio must occur either because of expectations of a persistent primary deficit, or expectations that interest rates will persistently exceed the rate of economic growth (or some combination of the two). This underscores why debt sustainability analysis often focuses on the primary budget balance, as a country’s debt-to-GDP ratio will be stable if no primary deficit exists and interest costs are at or below the prevailing rate of economic growth. Chart II-3 illustrates the source of the CBO’s projected rise in debt-to-GDP beyond 2031, by presenting the two components of the debt sustainability equation alongside the projected annual change in the debt-to-GDP ratio. The chart makes it clear that while the CBO is forecasting a sizeable primary deficit to continue, it is projected to grow at a slower pace than the debt-to-GDP ratio itself. The increasing rate at which the debt-to-GDP ratio is projected to grow in the latter years of the CBO’s forecast period is clearly driven by the interest rate component, meaning that “r” is projected to be greater than “g”. Chart II-4 presents this point directly, by highlighting that the CBO is forecasting the average interest rate on government debt to exceed that of nominal GDP growth in 2038, and to continue to exceed growth (by an increasing amount) thereafter. Chart II-3Decomposing The CBO's Projected Change In The Debt-To-GDP Ratio Chart II-4The CBO's Projections Rest, In Part, On Rates Eventually Exceeding Growth Three Adjustments To The CBO’s Baseline We make three adjustments to the CBO’s baseline in order to assess how the US fiscal outlook shifts under an interest rate path that is different than that projected by the CBO. First, we adjust the CBO’s projected budget deficit over the coming few years based on deficit forecasts from our US Political Strategy service following the passage of the American Recovery Plan act.5 Chart II-5We Test The Effect Of An Initially Higher, But More Sustainable, Rate Path Next, we adjust the interest component of the total budget deficit based on a new path for short- and long-term interest rates that models a scenario in which the neutral rate of interest rises to, but not above, GDP growth (Chart II-5). In last month’s report we outlined a scenario in which this could feasibly occur,3 and the hypothetical path for interest rates shown in Chart II-5 thus incorporates both the negative budgetary impact of an earlier rise in interest rates and the positive budgetary impact of “r” never rising above “g”. We explicitly exclude any crowding out effect on long-term interest rates, based on the view that term premia are likely to remain muted in a world of low potential economic growth, unless a fiscal crisis appears to be imminent (see Box II-1). Box II-1 Arguing Against The CBO’s Crowding Out Assumption The CBO’s projection that interest rates will ultimately rise above the rate of economic growth rests on the view that increased government spending will absorb savings that would otherwise finance private investment (a “crowding out” effect). We agree that crowding out can occur over the course of the business cycle, especially in a scenario where increased government spending pushes output above its potential (creating a cyclical acceleration in inflation and eventually an increase in interest rates). But the CBO is assuming that high government debt-to-GDP ratios will crowd out private investment on a structural basis, and on this basis we disagree. First, Chart Box II-1 highlights that there is essentially no empirical relationship across countries between a country’s debt-to-GDP ratio and its long-term government bond yield. Japan is a clear outlier in the chart, but including Japan implies that the relationship is negative, not positive. Chart Box II-1There Is No Empirical Relationship Between Debt-To-GDP And Interest Rates In addition, given that central banks directly control interest rates at the short-end of the curve, a structural crowding out effect can only manifest itself in the form of an elevated term premium embedded in longer-term government bond yields. Our bet is that term premia are likely to stay low in a world of low falling nominal growth, as evidenced by the experience of the past decade.6 Finally, we model the impact of two changes, beginning in 2031, that would work towards reducing the primary deficit: an increase in average government revenue to 20% of GDP (its peak level reached in 2000), and a slower pace of increase on major health care program spending. Despite the fact that population aging will increase mandatory spending on social security and health care over the coming three decades, the CBO has highlighted that the majority of the increase in spending towards these programs is projected to occur due to rising health care costs per person (Chart II-6). We thus model the impact of medical care cost control by limiting the rise in net mandatory outlays on health care programs between 2021 and 2051 to roughly half of what the CBO baseline projects. This adjustment does not prevent mandatory spending on health care programs from rising, given the strong political challenges involved in limiting spending increases that are caused by an aging population. Chart II-6The US Structural Primary Balance Is Heavily Impacted By Medical Costs Charts II-7 and II-8 illustrate how these three adjustments impact the long-term US fiscal outlook. Relative to the CBO’s baseline projections, the American Recovery Plan (ARP) budget deficit forecasts from our US Political Strategy service imply that the debt-to-GDP ratio will be approximately three to four percentage points higher over the very near term, and roughly ten points higher over the long term. Chart II-7Even With Higher Rates, The Fiscal Outlook Is Meaningfully Less Bad… Relative to this new baseline, an increase in interest rates to, but not above, the projected rate of nominal economic growth increases the debt-to-GDP ratio by an additional ten percentage points (20 points higher versus the CBO’s baseline) in the middle of the forecast period, but it lowers the debt-to-GDP ratio over the longer run by eliminating the effect of outsized interest rates magnifying a persistent primary deficit. Still, the debt-to-GDP ratio is projected to rise to a whopping 207% of GDP by 2051 in this scenario, with a budget deficit in excess of 10% of GDP. The third adjustment shown in Charts II-7 and II-8 underscores the impact on the US fiscal outlook of actions aimed at reducing the primary deficit. Increases in government revenue and the prevention of rising health care costs per person results in the debt-to-GDP ratio that is 64 percentage points lower in 2051 than in our normalized interest rate scenario. The budget deficit in this scenario still increases to approximately 6% of GDP thirty years from today, but in this case most of the deficit is due to the net interest component rather than the primary deficit, meaning that the debt-to-GDP ratio would be increasing at a much slower rate if interest rates were no higher than the rate of economic growth. Chart II-8 highlights that net interest spending in this scenario would rise to 4.5% of GDP, which would be meaningfully higher than the prior high of roughly 3% in the late 1980s and early 1990s. Chart II-8...With Higher Taxes And Medical Cost Control Chart II-9A Meaningful, But Not Unprecedented, Rise In Net Interest Outlays But that is far from unprecedented or necessarily consistent with a fiscal crisis. Chart II-9 also shows that Canada’s public debt charges rose to 6.5% of GDP in the early 1990s without triggering a public debt crisis. It is true that Canada subsequently embarked on a painful fiscal consolidation program in order to reduce its public debt burden, but this, in part, occurred because of a cyclically-adjusted primary deficit of approximately 3% - twice as large as that projected for the US in 2051 in our adjusted scenario shown in Charts II-7 and II-8. Revenue And Health Care Cost Reform Our third adjustment to the CBO’s long-term budget outlook involved changes to revenue and health care cost control to reduce the US’ projected primary deficit. Are these adjustments achievable? In our view, the answer is yes: As noted above, our scenario modeled these changes taking place a decade from today, which allows for policymakers and stakeholders to have a substantial amount of time to act and adjust to these changes. On the revenue front, we noted above that US government revenue has reached 20% of GDP in the past, in the year 2000. Chart II-10 highlights that while raising taxes will likely reduce US competitiveness, the US maintains a sizeable tax advantage relative to other advanced economies, and that this was true prior to the tax cuts that took place under the Trump administration. On the health care cost front, Chart II-11 highlights that US healthcare expenditure is much larger as a share of GDP than other countries, which was not the case prior to the 1980s. Chart II-12 highlights that this cost difference is entirely due to inpatient (i.e., hospital) and outpatient (i.e., drug) costs. While it is not clear what form it will take, it seems likely that future reforms by policymakers to eliminate rising health care costs per person will occur and can be achieved. Chart II-10The US Government Can Afford To Raise Revenue Chart II-11The US Spends Much More On Health Care Than Other Countries Chart II-12The US Significantly Outspends The World On Hospital And Drug Costs The key point for investors is not whether these changes should or should not occur, but whether there are any feasible scenarios in which spiraling government debt and interest payments are avoided without the Fed purposely maintaining monetary policy at levels persistently below the rate of economic growth – and thus risking major inflationary pressure. Our analysis above highlights that there are; the question is when policymakers will choose to act and in what form. A potential tipping point may be when US government spending on net interest as a % of GDP exceeds its prior high, which occurs in 2026 in the scenario modeled in Chart II-8. In a scenario where reforms fail to materialize or where financial markets force policymakers to act, a fiscal risk premium could certainly emerge in longer-term government bond yields, which could lead the Fed to maintain lower short-term interest rates than it otherwise would. But this scenario is only likely to emerge after interest rates converge towards rates of economic growth, as US government debt will remain highly serviceable for some time if "r" remains meaningfully lower than "g". Investment Conclusions There are three potential investment implications of our research. First, the fact that rising medical costs have such a significant impact on the CBO’s projections of the primary deficit implies that fiscal reform, when it eventually occurs, will be negative for US health care stocks. Chart II-13 highlights that US health care sector earnings have outperformed broad market earnings since the mid-1990s, and that the sector has consistently delivered an above-average return on equity. This historical performance likely reflects the sector’s pricing power, which stand to be curtailed through regulatory efforts in a world where rising health care costs per person collide with fiscal belt-tightening. Interestingly, Chart II-12 highlighted that US per capita spending on medical goods is not significantly higher than in other developed markets, suggesting that the health care equipment & supplies industry may fare better over a very long term time horizon than overall health care. Second, Charts II-7 and II-8 highlighted that even if the US does raise revenue as a share of GDP and limits excessive growth in medical costs, a primary deficit will still exist and net interest outlays will still rise to elevated levels compared to what has historically been the case. We noted that Canada experienced a higher public debt burden in the 1990s and did not suffer from a fiscal crisis, but Chart II-14 highlights that the fiscal situation did weigh on the Canadian dollar, which progressively traded 10-20% below its PPP-implied fair value level over the course of the 1990s. Thus, the implication is that eventual fiscal reform in the US may be structurally negative for the US dollar, from an overvalued starting point (panels 3 and 4 of Chart II-14). Chart II-13Eventual Fiscal Reform Will Likely Be Negative For Health Care Stocks Chart II-14The US Fiscal Outlook, Even With Some Reforms, Is Dollar-Negative Finally, our scenario analysis highlights that very elevated levels of government debt do not guarantee that interest rates will remain structurally low, especially over the next decade when the US primary deficit is projected to remain relatively stable. For investors focused on forecasting the direction of 10-year Treasury yields from the perspective of valuation, it should be noted that the next decade is the relevant projection period for the Fed funds rate, not what occurs to net interest outlays in the two decades that follow. Over the very long run, it is true that there may ultimately be very strong political pressure on the Fed to keep interest rates below the prevailing rate of economic growth, as policymakers in 2030 will be able to avoid a structural adjustment to the primary deficit of roughly 1.1-1.3% of GDP for every percentage point that average interest rates on government debt are below nominal GDP growth. However, we noted above that this pressure is unlikely to build before the second half of this decade even in a scenario where interest rates rise significantly over the coming few years, and it remains an open questions whether the Fed will acquiesce to this pressure given its strong potential to fuel excess private sector leveraging. Over the coming one to two years, the key conclusion is that the US fiscal outlook is not likely to prevent an increase in interest rates over the coming few years in the hypothetical scenario that we described in last month’s report, i.e., an environment where the narrative of secular stagnation is challenged and investor expectations for the neutral rate rise closer to trend rates of economic growth. This remains a risk to our overweight stance towards risky assets and is not our base case view. But it does highlight the importance of monitoring long-dated rate expectations over the coming year, and argues, on a risk-adjusted basis, for a below-neutral duration stance within a fixed-income portfolio. Jonathan LaBerge, CFA Vice President The Bank Credit Analyst III. Indicators And Reference Charts BCA’s equity indicators highlight that the “easy” money from expectations of an eventual end to the pandemic have already been made. Our technical, valuation, and sentiment indicators are very extended, highlighting that investors should expect positive but more modest returns from stocks over the coming 6-12 months. Our monetary indicator has aggressively retreated from its high last year, reflecting a meaningful recovery in government bond yields. The indicator remains above the boom/bust line, however, highlighting that monetary policy remains supportive for risky asset prices. Forward equity earnings already price in a complete earnings recovery, but for now there is no meaningful sign of waning forward earnings momentum. Net revisions remain positive, and positive earnings surprises have risen to their strongest levels on record. Within a global equity portfolio, EM stocks have dragged down global ex-US performance, likely in response to deteriorating leading indicators for the Chinese economy. This implies that they are not likely to lead global ex-US equity performance higher over the course of the year barring an imminent shift in Chinese policy. We continue to expect that euro area stocks will have to do the heavy lifting, driven either by the underperformance of global technology stocks or the outperformance of euro area financials – which are extremely cheap relative to US banks and have much further scope for earnings to normalize as the pandemic draws to a close. The US 10-Year Treasury yield has edged lower over the past month, after having risen to levels that were extremely technically stretched. Despite this pause, our valuation index highlights that bonds are still expensive, and that yields could move higher over the cyclical investment horizon. We expect the rise to be more modest than our valuation index would imply, but we would still recommend a modestly short duration stance within a fixed-income portfolio. Commodity prices, particularly copper, lumber, and agricultural commodities, are screaming higher. This reflects bullish cyclical conditions, but also pandemic-induced supply shortages that are likely to wane later this year. Commodity prices are technically extended and sentiment is extremely bullish for most commodities, suggesting that a breather in commodity prices is likely at some point over the coming several months. US and global LEIs remain in a solid uptrend, and global manufacturing PMIs are strong. Our global LEI diffusion index has declined significantly, but this likely reflects the outsized impact of a few emerging market countries (whose vaccination progress is lagging). Strong leading and coincident indicators underscore that the global demand for goods is robust, and that output is below pre-pandemic levels in most economies because of very weak services spending. The latter will recover significantly later this year, as social distancing and other pandemic control measures disappear. EQUITIES: Chart III-1US Equity Indicators Chart III-2Willingness To Pay For Risk Chart III-3US Equity Sentiment Indicators Chart III-4Revealed Preference Indicator Chart III-5US Stock Market Valuation Chart III-6US Earnings Chart III-7Global Stock Market And Earnings: Relative Performance Chart III-8Global Stock Market And Earnings: Relative Performance FIXED INCOME: Chart III-9US Treasurys And Valuations Chart III-10Yield Curve Slopes Chart III-11Selected US Bond Yields Chart III-1210-Year Treasury Yield ComponentsChart III-13US Corporate Bonds And Health Monitor Chart III-14Global Bonds: Developed Markets Chart III-15Global Bonds: Emerging Markets CURRENCIES: Chart III-16US Dollar And PPP Chart III-17US Dollar And Indicator Chart III-18US Dollar Fundamentals Chart III-19Japanese Yen Technicals Chart III-20Euro Technicals Chart III-21Euro/Yen Technicals Chart III-22Euro/Pound Technicals COMMODITIES: Chart III-23Broad Commodity Indicators Chart III-24Commodity Prices Chart III-25Commodity Prices Chart III-26Commodity Sentiment Chart III-27Speculative Positioning ECONOMY: Chart III-28US And Global Macro Backdrop Chart III-29US Macro Snapshot Chart III-30US Growth Outlook Chart III-31US Cyclical Spending Chart III-32US Labor Market Chart III-33US Consumption Chart III-34US Housing Chart III-35US Debt And Deleveraging Chart III-36US Financial Conditions Chart III-37Global Economic Snapshot: Europe Chart III-38Global Economic Snapshot: China Jonathan LaBerge, CFA Vice President The Bank Credit Analyst Footnotes 1 Please see Global Investment Strategy "Taxing Woke Capital," dated April 16, 2021, available at gis.bcaresearch.com 2 Please see The Bank Credit Analyst Special Report "R-star, And The Structural Risk To Stocks," dated March 31, 2021, available at bca.bcaresearch.com 3 Please see The Bank Credit Analyst Special Report "R-star, And The Structural Risk To Stocks," dated March 31, 2021, available at bca.bcaresearch.com 4 Presented in this fashion, a budget deficit (surplus) is recorded with a positive (negative) sign. 5 For more information, please see US Political Strategy report “Biden’s Pittsburgh Speech And Legislative Agenda,” dated April 1, 2021, available at usp.bcaresearch.com 6 Please see “Term premia: models and some stylised facts”, by Cohen, Hördahl, and Xia, BIS Quarterly Review, September 2008.
Highlights Duration: Foreign inflows and dollar strength may give us a reason to turn bullish on US bonds at some point in the future, but not yet. For now, investor sentiment toward the dollar is more consistent with rising US bond yields than falling US bond yields. Maintain below-benchmark portfolio duration. Municipal Bonds: The economic and policy back-drop is favorable for municipal bonds, but value is not universally attractive. Investors should favor long maturity General Obligation and Revenue bonds over investment grade corporates with the same credit rating and duration. Investors should also overweight taxable municipal bonds versus investment grade corporate credit. High-Yield Munis are fairly valued relative to High-Yield corporates. Economy: The US economy is currently suffering from a shortage of labor. That is, job openings are unusually high given the current unemployment rate. Feature The recent pullback in US bond yields continues to confound commentators. As we noted in last week’s report, the 10-year Treasury yield’s 8 basis point drop on April 15th occurred on a day when the US economic data surprised to the upside.1 Since then, bond yields have held steady even as the trend toward stronger economic data has persisted. Our explanation for the divergence between bond yields and the economic data is that the yield curve had already discounted a rapid economic recovery and the incoming data are simply confirming that narrative. But many alternative explanations have also been put forth to explain the drop in yields. One of those explanations is that the attractiveness of US bonds to foreign investors has resulted in a wave of foreign buying that has pushed US yields lower. Our view is that foreign interest might become a reason to turn bullish on bonds at some point, but it is not currently a meaningful factor weighing on US yields. Foreign Inflows Are Not To Blame For Falling US Bond Yields Chart 1 illustrates that US bond yields are significantly higher than yields in Germany and Japan (two of the other major developed bond markets), a dynamic that has been in place since 2013. However, US yields have both risen and fallen at different times since 2013, so the fact that they are higher than yields in Germany and Japan is not a sufficient reason to expect that foreign inflows will push US bond yields lower. One potential problem with Chart 1 is that it shows local currency bond yields. That is, if a German investor buys a 10-year US Treasury note today with a plan to sell it in three months, he is exposed to both the risk that the 10-year US yield will rise during the next three months and to the risk that the US dollar will depreciate against the euro. For this reason, many global fixed income investors choose to hedge the currency risk in their portfolios, an action that significantly alters the attractiveness of foreign bonds. The second and third panels of Chart 2 show the yield advantage in the 10-year US Treasury note compared to the 10-year German bund and 10-year JGB, respectively, after hedging all yields into a common currency. We assume a 3-month investment horizon. The message is that US yields are still highly attractive to foreign investors, even after the currency risk is hedged. Chart 1Higher Yields In US Bonds Chart 2Dollar Sentiment Supports Higher Yields In common-currency terms, German investors can pick up an extra 108 bps in the 10-year US Treasury note compared to the 10-year German bund, about the same amount of extra compensation that was available in 2014 and 2003 (Chart 2, panel 2). Japanese investors can pick-up even more extra compensation (115 bps) by moving out of 10-year JGBs and into US Treasuries, though US Treasuries looked even more attractive relative to JGBs in 2014 and 2003 (Chart 2, panel 3). Whether they hedge currency risk or not, there’s no doubt that foreign investors can gain a significant yield pick-up by moving into the US bond market. The more important question, however, is whether these international yield spreads tell us anything about the future direction of US bond yields. To answer that question, we look at two other periods when US yields were very attractive to foreign investors: 2003 and 2014. Hedged US yields were elevated in 2003, but the US dollar was also near the beginning of a multi-year bear market (Chart 2, panel 4) and investor sentiment toward the US dollar was deeply bearish (Chart 2, bottom panel). In that environment, the 10-year US Treasury yield moved higher for several years, despite its attractiveness to foreign investors. The opposite occurred in 2014. US bonds once again offered an attractive yield pick-up to foreign investors, but this time the US dollar was near the beginning of a bull run (Chart 2, panel 4) and investor sentiment was tilted in favor of a stronger dollar (Chart 2, bottom panel). The result is that US bond yields fell, aided by greater foreign demand. Looking at the contrast between 2003 and 2014, it is clear the spread between US yields and foreign yields is much less predictive of future bond moves than the path of the US dollar and investor sentiment toward the dollar. At present, with dollar sentiment deep into bearish territory (Chart 2, bottom panel), it is unlikely that foreign demand is weighing on US bond yields in any meaningful way. Bottom Line: Foreign inflows and dollar strength may give us a reason to turn bullish on US bonds at some point in the future, but not yet. For now, investor sentiment toward the dollar is more consistent with rising US bond yields than falling US bond yields. Maintain below-benchmark portfolio duration. Municipal Bonds: Better Than Credit The performance of municipal bonds since US Treasury yields troughed last August has been truly remarkable (Table 1). The Bloomberg Barclays Municipal Bond Index has returned +2.02% while comparable Treasury and Credit indexes booked losses. The outperformance has extended into Taxable Munis, where returns have been less negative than in Aa-rated Credit, and to High-Yield Munis which have outperformed their corporate counterparts. Table 1Total Returns Since The Bottom In Treasury Yields Two main factors are responsible for the outperformance of municipal bonds. First, state & local government tax revenues recovered much more quickly than many anticipated at this time last year. In fact, they have already taken out their pre-COVID highs and are growing at a pace of 5.25% per year (Chart 3). Second, the federal government stepped in and delivered $350 billion of funding (~1.6% of GDP) to state & local governments as part of the recently enacted American Rescue Plan. This support comes on top of the spike in Federal Grants-In-Aid that resulted from the passage of last year’s CARES act (Chart 3, panel 3). It’s certainly true that state & local governments also faced incredibly high expenses last year as they battled the pandemic, yet they still managed to eke out positive net savings in 2020 as a whole (Chart 3, bottom panel). Chart 3S&L Government Balance Sheets Healing Quickly The outlook for state & local government balance sheets will continue to brighten as the rapid economic recovery pushes up tax revenues and the American Rescue Plan’s transfers are doled out. This will support municipal bond returns. What’s more, President Biden’s recently announced plan to increase the income tax rate on high income individuals could bolster municipal bond performance. Granted, there is no guarantee that this proposed tax change will occur. The President will include the income tax hike in the American Families Plan, a proposal that will not hit the legislative agenda until 2022 as the government concentrates on passing the infrastructure-focused American Jobs Plan this year. There is a good chance that there won’t be enough time to pass the American Families Plan before the 2022 midterm election, after which the composition of Congress could change. Our US Political Strategy service puts the odds of the American Families Plan passing before the 2022 midterm at 50/50.2 Nevertheless, the mere threat of higher income taxes might be all it takes to drive interest toward tax-exempt municipal bonds. All in all, we see the President’s rhetoric as providing a tailwind to muni returns. Clearly, our view is that the economic landscape is positive for municipal bond performance. But value has deteriorated markedly in some parts of the sector, and investors need to be selective. The rest of this section considers where the most attractive municipal bond opportunities lie. Aaa Munis Versus Treasuries Investors should shy away from Aaa-rated municipal bonds. Aaa-rated Muni / Treasury yield ratios have already collapsed, particularly at the long-end of the curve (Chart 4). As is the case in corporate credit, investors need to move down the quality spectrum to find compelling opportunities. Chart 4Aaa Muni / Treasury Yield Ratios Investment Grade Munis Versus Credit Some of those compelling opportunities can be found in lower-rated investment grade municipals, particularly relative to investment grade credit. If we match the credit rating and duration between the Bloomberg Barclays General Obligation (GO) Municipal Index and the Bloomberg Barclays Credit Index, we find that long-maturity GOs look very attractive (Chart 5). Investors facing a tax rate of 2% or higher receive a greater after-tax yield in GO Munis than in Credit at the very long-end of the curve (17+ years to maturity). GO Munis in the 12-17 year maturity bucket also look attractive relative to Credit, with a breakeven tax rate of 10%. The after-tax yield pick-up in GO Munis is less favorable in the belly of the curve. Investors in the 8-12 year maturity bucket face a breakeven tax rate of 28% and those in the 6-8 year maturity bucket face a breakeven tax rate of 39%. Revenue bonds offer better value than GOs. In fact, revenue Munis with maturities above 12 years offer a before-tax yield pick-up compared to Credit with the same credit rating and duration (Chart 6). Even at shorter maturities, the breakeven tax rate for revenue bonds versus Credit is fairly attractive. Investors in the 6-8 year maturity bucket face a breakeven tax rate of 28% and those in the 8-12 year maturity bucket face a breakeven tax rate of 18% Chart 5GO Munis Versus Credit Chart 6Revenue Munis Versus Credit Taxable Munis Chart 7Taxable Muni Spread Versus Credit Rating And Duration Matched Credit Even though they won’t benefit from any upcoming changes to the tax code, taxable municipal bonds are an attractively priced alternative to investment grade Credit (Chart 7). After matching the duration and credit rating, the Bloomberg Barclays Taxable Municipal Index offers a yield pick-up of 43 bps versus investment grade Credit. Shorter maturities offer a yield pick-up of 30 bps and longer maturities offer 55 bps. These seem like yield premiums worth grabbing given the favorable economic environment for state & local government balance sheets. High-Yield Munis Chart 8High-Yield Munis Versus Corporates Finally, we look at high-yield municipal bonds and find that they are fairly valued compared to high-yield corporate bonds. The High-Yield Municipal Index offers a yield that is only 88 bps below that of the credit rating and duration matched High-Yield Corporate Index, which is relatively high compared to recent years (Chart 8). That 88 bps yield differential translates to a breakeven tax rate of 21%. That is, any investor facing a tax rate above 21% will get a greater after-tax yield in high-yield Munis than in high-yield corporates. While the yield spread is reasonably attractive, it’s important to note that the High-Yield Municipal Index is extremely negatively convex (Chart 8, bottom panel) and thus prone to extension risk if bond yields rise. This means that the appearance of attractive relative value in high-yield Munis will quickly evaporate as bond yields rise and muni yields start getting compared to a longer-duration benchmark. All in all, we judge value in high-yield Munis to be neutral relative to high-yield corporates. Bottom Line: The economic and policy back-drop is favorable for municipal bonds, but value is not universally attractive. Investors should favor long maturity General Obligation and Revenue bonds over investment grade corporates with the same credit rating and duration. Investors should also overweight taxable municipal bonds versus investment grade corporate credit. High-Yield Munis are fairly valued relative to High-Yield corporates. Economy: The Labor Shortage Won't Last Chart 9Help Wanted! An interesting recent economic development has been increased concern about the availability of labor. The Fed’s April 2021 Beige Book noted that “hiring remained a widespread challenge” and the number of small businesses having difficulty filling vacancies has spiked (Chart 9). This seems odd given that the economy is still missing 8.4 million jobs compared to February 2020. So what exactly is going on? The Beveridge Curve – the relationship between job openings and the unemployment rate – is the classic way to track shifts in structural unemployment (Chart 10). Notice that the curve has shifted sharply to the right during the past few months. This confirms the anecdotes from the Beige Book and the NFIB survey. There are, in fact, significantly more available jobs for the same unemployment rate. Chart 10The Beveridge Curve If this rightward shift in the Beveridge Curve proves to be permanent, it would mean that the natural rate of unemployment is higher than we thought and that we should expect wage-driven inflationary pressures to emerge earlier in the recovery. However, we suspect that the recent rightward shift in the Beveridge Curve is not permanent and that it will move back toward more normal levels as COVID’s impact subsides. We see two possible reasons for the Beveridge Curve’s rightward shift. First, the combination of expanded unemployment benefits and stimulus checks on offer from the federal government may be discouraging people from going back to work, even as jobs become available. To the extent that this is a factor holding back job growth, it will soon subside. The last of the COVID stimulus checks are currently being delivered and expanded unemployment benefits will expire in September. Second, there are many other COVID-related reasons why people may be reluctant to go back to work. They could fear getting sick or may have increased responsibilities at home due to school or daycare closures. These factors too will eventually subside as the nation reaches herd immunity and slowly returns to normal. An industry breakdown of job openings provides some evidence that the rightward shift in the Beveridge Curve will prove transitory. Chart 11A shows that the ‘Leisure & Hospitality’ and ‘Education & Healthcare’ sectors have the highest rates of job openings, and Chart 11B shows that they have both seen large increases in job openings since the pandemic began. This tells us that the increase in job openings has been concentrated in those sectors most impacted by the pandemic. It stands to reason that the dynamic will reverse as COVID becomes less of a concern. Chart 11AJob Openings Rate By Industry Chart 11BChange In Job Openings Rate By Industry For bond investors, it’s worth noting that the current labor shortage means that the downward trend in the unemployment rate will not immediately be offset by a rapidly rising labor force participation rate. That is, we could see the unemployment rate reach the Fed’s target range relatively soon, but with a labor force participation rate that is well below pre-COVID levels (Chart 12). Fortunately, the Fed has told us that it wants to see both 3.5% - 4.5% unemployment and a return to pre-COVID participation rates before it will lift interest rates. Chart 12Fed Targets Both The Unemployment Rate And The Part Rate In other words, the Fed also believes that the rightward shift in the Beveridge Curve will be transitory and it will not rush to tighten policy if the labor force participation rate remains low. Our own expectation is that labor shortage issues will be resolved by next year and that the Fed will be comfortable lifting rates before the end of 2022.3 Ryan Swift US Bond Strategist rswift@bcaresearch.com Footnotes 1 Please see US Bond Strategy Weekly Report, “A New Conundrum”, dated April 20, 2021, available at usbs.bcaresearch.com 2 Please see US Political Strategy Weekly Report, “Biden’s Pittsburgh Speech And Legislative Agenda”, dated April 1, 2021, available at usps.bcaresearch.com 3 For more details on our outlook for Fed policy please see US Bond Strategy Weekly Report, “A New Conundrum”, dated April 20, 2021, available at usbs.bcaresearch.com Fixed Income Sector Performance Recommended Portfolio Specification
Aspectos destacados
Duración: El ritmo de las subidas de tipos que actualmente cotiza el mercado es razonable. Sin embargo, vemos altas probabilidades de que las expectativas del mercado aumenten en los próximos meses, como resultado de la continuidad de sólidos datos económicos y de que la Fed comience a hablar de reducir sus compras de activos. Los inversores deberían mantener la duración de la cartera por debajo del índice de referencia.
MBS: Los MBS siguen siendo poco atractivos en comparación con otros productos de spread estadounidenses. Pero dentro de una asignación infraponderada a MBS, tiene sentido una inclinación hacia cupones altos.
Inflación: La inflación interanual del IPC se vio impulsada al alza por efectos de base en marzo, pero el informe también mostró evidencia de crecientes presiones inflacionarias más allá de los simples efectos de base.
Tema
Tras una caída considerable el pasado jueves, los rendimientos del Tesoro están ahora significativamente por debajo de sus máximos recientes. El rendimiento del Treasury a 10 años alcanzó un máximo de 1.74% el 31 de marzo.º pero terminó la semana pasada en solo 1.59%. Lo que hace que la caída sea desconcertante es que los rendimientos han bajado a pesar de una serie de datos económicos estadounidenses muy sólidos (Gráfico 1).
Este desarrollo reciente se parece al famoso enigma de los bonos de 2004/05, cuando el presidente de la Fed Alan Greenspan luchó por entender por qué los rendimientos de los Treasuries a largo plazo estaban cayendo incluso cuando la Fed aumentaba las tasas a corto plazo.1 Hoy, los inversores también están luchando por entender por qué los rendimientos a largo plazo están cayendo, solo que esta vez el “enigma” es que lo hacen frente a datos económicos fuertes.
Desde nuestro punto de vista, ambos enigmas tienen la misma respuesta: el mercado ya ha descontado gran parte de las noticias.
El 29 de junio.º de 2004 – el día antes de la primera subida de tipos de ese ciclo – la curva del overnight index swap (OIS) estaba valuada para 243 pb de subidas de la Fed en los siguientes 12 meses. La Fed llegó a aplicar 200 pb de subidas durante ese periodo, algo menos de lo que esperaba el mercado. En ese entorno es totalmente consistente que los rendimientos de los bonos cayeran (Gráfico 2).
Gráfico 1
Rendimientos a la baja pese a datos económicos sólidos
Rendimientos a la baja por datos sólidos
Rendimientos a la baja por datos sólidos
Gráfico 2
El enigma de los bonos 2004/05
El enigma de los bonos 2004/05
El enigma de los bonos 2004/05
Hoy, la curva OIS cotiza que la Fed elevará las tasas por encima del límite de cero en diciembre de 2022 y que habrá un total de 86 pb de subidas para finales de 2023 (Gráfico 3). Dado el nuevo régimen de Objetivo de Inflación Promedio (Average Inflation Targeting) de la Fed, este tipo de ciclo de subidas solo se alcanzará si hay una recuperación económica de EE. UU. muy fuerte. Los datos entrantes de EE. UU. hasta ahora confirman esa narrativa, pero no han sido lo bastante fuertes como para elevar aún más las expectativas de tipos.
Gráfico 3
El mercado cotiza despegue en diciembre de 2022
El mercado descuenta un despegue en diciembre de 2022
El mercado descuenta un despegue en diciembre de 2022
Como escribimos en el informe de la semana pasada, creemos que las expectativas de subidas de tipos que actualmente tiene el mercado parecen razonables.2 Sin embargo, vemos un riesgo significativo de que podrían aumentar en los próximos meses a medida que continúe la rápida recuperación económica de EE. UU. y la Fed empiece a alejarse de su mensaje extremadamente acomodaticio.
Gráfico 4
EE. UU. alcanzará 75% de vacunación mucho antes de septiembre
Estados Unidos alcanzará el 75% de vacunación mucho antes de septiembre
Estados Unidos alcanzará el 75% de vacunación mucho antes de septiembre
Por ejemplo, el presidente de la Fed, Jay Powell, ha dicho repetidamente que es demasiado pronto para hablar sobre la reducción de las compras de activos de la Fed. Nos preocupa, sin embargo, que este tono pueda dar a los inversores una falsa sensación de seguridad. Si la recuperación económica continúa al ritmo actual, esperamos plenamente que la Fed empiece a hablar sobre la reducción este año y que inicie el proceso ya sea a finales de 2021 o a principios de 2022.
La semana pasada, el presidente de la Fed de St. Louis, Jim Bullard, dijo que se sentiría cómodo iniciando conversaciones sobre la reducción cuando el 75%-80% de la población de EE. UU. haya sido vacunada. Estimamos que si las vacunaciones continúan a un ritmo lineal, alcanzaremos el 75% de vacunación para septiembre (Gráfico 4). Dado el ritmo exponencial de vacunaciones hasta la fecha, es probable que lleguemos al 75% mucho antes de septiembre.
La conclusión es que vemos el ritmo de subidas de tipos que actualmente cotiza el mercado como razonable. Sin embargo, también vemos altas probabilidades de que las expectativas del mercado aumenten en los próximos meses, como resultado de la continuidad de sólidos datos económicos y de que la Fed empiece a hablar de reducir sus compras de activos. Los inversores deberían mantener la duración de la cartera por debajo del índice de referencia.
MBS: Mantenerse en cupones altos
No sorprende que la apuesta por la reflación haya sido beneficiosa para los activos de riesgo. Dentro de la renta fija estadounidense, los productos de spread en general han superado a los Treasuries desde que los rendimientos tocaron suelo en agosto pasado. Sin embargo, ciertos sectores de spread han tenido mejor desempeño que otros.
Por ejemplo, los Agency Mortgage-Backed Securities no lo han hecho tan bien. Los MBS convencionales Agency a 30 años solo han superado a una posición en títulos del Tesoro con duración equivalente por 73 pb desde que los rendimientos tocaron suelo el 4 de agosto.º de 2020 (Gráfico 5). Esto se compara con 446 pb de sobrerendimiento para los corporativos con calificación Aaa, 342 pb de sobrerendimiento para los corporativos con calificación Aa (Gráfico 5, panel 2) y 232 pb de sobrerendimiento para Agency CMBS (Gráfico 5, panel 3). Solo los ABS de consumo con la notoria calificación de bajo riesgo Aaa han ofrecido menos sobrerendimiento que los Agency MBS (Gráfico 5, panel inferior).
Aunque los Agency MBS no han tenido un buen desempeño en conjunto, ciertos segmentos de la escala de cupones han entregado rendimientos en exceso decentes. Específicamente, los MBS de cupones altos lo han hecho mucho mejor que los de cupones bajos durante el reciente repunte de los rendimientos. Desde el pasado agosto, los MBS con cupón 4% han superado a los Treasuries con duración equivalente por 176 pb y los cupones 4.5% han superado por 257 pb. Mientras tanto, los cupones de 2.5% han quedado rezagados por 10 pb y los cupones de 3% han quedado rezagados por 15 pb (Gráfico 6).
Gráfico 5
Rendimiento de productos de spread desde el mínimo de los rendimientos de bonos
Desempeño del producto de spread desde el punto más bajo de los rendimientos de los bonos
Desempeño del producto de spread desde el punto más bajo de los rendimientos de los bonos
Gráfico 6
Favorecer cupones premium en un entorno de tipos al alza
Prefiera cupones premium en un entorno de tasas al alza
Prefiera cupones premium en un entorno de tasas al alza
La divergencia en el desempeño entre cupones altos y bajos se explica fácilmente por las características de riesgo de esos bonos. Al observar la diferencia entre los cupones de 2.5% y 4%, por ejemplo, vemos que los cupones de 2.5% tienen una duración significativamente mayor y una convexidad significativamente menor (Gráfico 6, los dos paneles inferiores). La mayor duración significa que la subida de los rendimientos perjudica más a los cupones de 2.5% y la menor convexidad significa que la subida de los rendimientos hará que la brecha entre la duración del cupón 2.5% y la del 4% se amplíe aún más. En resumen, un entorno de rendimientos al alza es terrible para los MBS de cupones bajos. A la inversa, una alta duración y baja convexidad son atributos deseables en un entorno de rendimientos a la baja. Si los rendimientos de los bonos caen de forma considerable en el futuro, entonces los MBS de cupones bajos superarán a los de cupones altos.
Gráfico 7A muestra cómo el spread ajustado por opciones (OAS) varía con la duración a lo largo de la escala de cupones convencionales Agency MBS a 30 años. Vemos que los cupones más bajos tienen las duraciones más altas y los OAS más bajos. Los cupones premium tienen duraciones bajas y OAS altos.
Gráfico 7A
Pila de cupones MBS agency convencionales a 30 años: OAS vs. duración
Un Nuevo Enigma
Un Nuevo Enigma
Gráfico 7B muestra cómo el OAS varía con la convexidad a lo largo de la escala de cupones. Aquí vemos que los cupones de 2%, 2.5% y 3% tienen las convexidades más negativas. Esto tiene sentido ya que esos cupones están más próximos a la tasa hipotecaria actual del 3.04%. Un aumento adicional en la tasa hipotecaria haría que esos cupones fueran menos propensos a refinanciarse, provocando una extensión significativa de las duraciones. A la inversa, una caída en la tasa hipotecaria llevaría a más refinanciaciones para esos cupones, provocando que las duraciones se acorten. Nótese que los MBS con cupón 1.5% tienen una convexidad relativamente alta. Esto se debe a que la refinanciación ya es poco atractiva para esos bonos y la duración del índice de 1.5% ya se ha extendido.
Gráfico 7B
Pila de cupones MBS agency convencionales a 30 años: OAS vs. convexidad
Un nuevo enigma
Un nuevo enigma
Dado nuestro punto de vista de que los rendimientos del Tesoro de EE. UU. estarán planos o al alza en los próximos 6-12 meses, recomendamos una inclinación hacia cupones altos dentro de los Agency MBS. Específicamente, los cupones de 2%, 2.5% y 3% tienen mayor margen para la extensión de la duración en un entorno de rendimientos al alza y deben evitarse. Los cupones de 4% y 4.5%, por otro lado, son menos negativos en convexidad y están mejor preparados para capear la tormenta de rendimientos al alza.
En un entorno de rendimientos planos, los cupones que mejor se comportarán probablemente serán aquellos con los OAS más amplios. Esto hace que los cupones de 4% y 4.5% parezcan mucho más atractivos que los cupones de 1.5%, aunque tengan convexidades similares.
En general, recomendamos poseer los cupones de 4% y 4.5% dentro de la escala de cupones convencionales Agency MBS a 30 años y evitar los cupones de 2%, 2.5% y 3%.
Un último punto que vale la pena mencionar es que también seguimos recomendando una asignación infraponderada a MBS dentro de una cartera de bonos de EE. UU. Es decir, aunque los MBS de cupones altos se ven mejor que los de cupones bajos, todo el sector resulta poco atractivo en comparación con alternativas como los ABS de consumo, los Agency CMBS e incluso los bonos corporativos de grado de inversión.
Gráfico 8 muestra una versión de nuestro Excess Return Bond Map, una guía visual que es útil para evaluar rápidamente la relación riesgo/recompensa entre distintos productos de spread estadounidenses.3 El Mapa muestra el OAS como medida de rendimiento esperado en el eje Y, y una medida propietaria de riesgo llamada “Risk Of Losing 100 Bps” en el eje X. Un número más alto en el eje X indica menos riesgo de perder 100 pb y viceversa.
Gráfico 8
Mapa de rendimiento en exceso de bonos
Un nuevo enigma
Un nuevo enigma
Nuestro Mapa de Bonos deja claro que solo los MBS con cupón 4% y 4.5% se acercan a ofrecer un equilibrio riesgo/recompensa comparable al de otros sectores de spread. Los cupones MBS por debajo del 4% ofrecen un rendimiento esperado demasiado bajo dado el nivel de riesgo.
Conclusión: Mantener infraponderación en MBS dentro de una cartera de bonos de EE. UU., pero favorecer los cupones de 4% y 4.5% sobre los cupones de 2%, 2.5% y 3% dentro de la escala de cupones Agency MBS.
IPC de marzo: más que un efecto de base
Era bien sabido antes de la publicación del IPC de marzo de la semana pasada que la cifra de inflación interanual iba a ser muy alta. Esto se debe a efectos de base que persistirán hasta fines de mayo. Es decir, la inflación de 12 meses está destinada a aumentar a medida que las cifras mensuales negativas de inflación de marzo, abril y mayo de 2020 salgan de la muestra móvil de 12 meses.
Las cifras de inflación interanual sí aumentaron bruscamente en marzo (Gráfico 9). El IPC general a 12 meses saltó de 1.68% a 2.64% y el IPC subyacente a 12 meses aumentó de 1.28% a 1.65%. Los efectos de base ejercen menos influencia sobre el IPC de media recortada, y ese índice solo subió de 2.04% a 2.12%. La brecha entre el IPC subyacente a 12 meses y el IPC de media recortada a 12 meses sigue siendo amplia, pero debería cerrarse en mayo cuando se agoten los efectos de base del año pasado (Gráfico 9, panel inferior).
Gráfico 9
Inflación anual
Inflación anual
Inflación anual
Gráfico 10
Inflación mensual
Inflación mensual
Inflación mensual
Pero los efectos de base fueron solo parte de la historia la semana pasada. La inflación mes a mes también fue muy fuerte para las medidas general, subyacente y de media recortada. El IPC general subió 0.62% en marzo, el IPC subyacente subió 0.34% y la media recortada subió 0.24% (Gráfico 10).
Para poner esos números en contexto, si esas cifras mensuales se repitieran en abril y mayo, el IPC general a 12 meses aumentaría hasta 4.75% en mayo y el IPC subyacente a 12 meses aumentaría hasta 2.79%. Incluso si asumimos tasas de inflación más típicas del 0.15% para abril y mayo, aún esperaríamos que el IPC general a 12 meses alcance 3.77% en mayo y que el IPC subyacente a 12 meses alcance 2.41%.
En conjunto, el mensaje del informe del IPC de marzo es que la economía está mostrando señales de crecientes presiones inflacionarias más allá de los simples efectos de base. Anteriormente hemos escrito sobre la abundante evidencia de cuellos de botella tanto en los sectores de bienes como de servicios, y ahora parece que esos cuellos de botella aparecen en los datos de precios.4
No hay duda de que la inflación a 12 meses caerá algo entre mayo y fines de año. Sin embargo, anticipamos que la inflación todavía estará cerca del objetivo de la Fed a fines de 2021. Esto ciertamente será así si las cifras mensuales de inflación se mantienen consistentes con la lectura de marzo. La principal implicación para la inversión de esta visión es que la baja inflación no impedirá que la Fed reduzca sus compras de activos ya sea a finales de este año o a principios del próximo, y tampoco impedirá que la Fed suba las tasas en 2022.
Notas al pie
1 Comentarios de Greenspan: https://www.federalreserve.gov/boarddocs/hh/2005/february/testimony.htm
2 Consulte el Informe semanal de estrategia de bonos de EE. UU., “Overshoot Territory”, fechado el 13 de abril de 2021, disponible en usbs.bcaresearch.com
3 Para más detalles sobre el Bond Map, consulte la página 16 de US Bond Strategy Portfolio Allocation Summary, “It’s A Boom!”, fechado el 6 de abril de 2021, disponible en usbs.bcaresearch.com
4 Consulte el Informe semanal de estrategia de bonos de EE. UU., “Limit Rate Risk, Load Up On Credit”, fechado el 16 de marzo de 2021, disponible en usbs.bcaresearch.com
Ryan Swift Estratega de bonos de EE. UU. rswift@bcaresearch.com
Desempeño del sector de renta fija
Especificación de cartera recomendada
Aspectos destacados
Gráfico de la semana
¿Se está transfiriendo a Canadá el manto del oso de los bonos?
¿Se está pasando el manto del oso de los bonos a Canadá?
¿Se está pasando el manto del oso de los bonos a Canadá?
Bonos del Tesoro de EE. UU.: La subida sostenida de los rendimientos de los bonos estadounidenses ha dejado a los bonos con vencimientos más largos en una posición de sobreventa. Sin embargo, el impulso subyacente del crecimiento y la inflación sigue siendo bajista para los bonos y es probable que la Fed comience a preparar el mercado más adelante este año para una reducción de las compras de activos en 2022. Mantener una postura defensiva a medio plazo respecto a los bonos del Tesoro de EE. UU. (duración por debajo del índice de referencia y una asignación de país con infraponderación).
Canadá: La economía canadiense está ganando un impulso positivo significativo, con un ritmo de vacunación más rápido que aumenta el optimismo a pesar de una tercera ola de COVID-19. Ahora vemos un riesgo creciente de que el Banco de Canadá cambie a una postura de política menos acomodaticia en los próximos meses, liderado por una reducción de sus compras de bonos, quizá incluso antes de que la Fed haga lo mismo (Gráfico de la semana). Rebajar la calificación de los bonos gubernamentales canadienses a infraponderación en las carteras globales de renta fija.
Bonos del Tesoro de EE. UU.: La pausa que refresca
Gráfico 2
La tendencia alcista del rendimiento del Tesoro de EE. UU. se ha detenido
La tendencia alcista del rendimiento del UST se ha pausado
La tendencia alcista del rendimiento del UST se ha pausado
Tras liderar la caída del mercado global de bonos gubernamentales en los últimos meses, los rendimientos de los bonos del Tesoro de EE. UU. se han calmado últimamente. El rendimiento a 10 años del Tesoro ha caído 14 pb desde el pico más reciente de 1,74% alcanzado el 31 de marzo, mientras que el rendimiento del Tesoro a 30 años ha caído 16 pb desde el pico de 2,45% alcanzado el 18 de marzo. Estos movimientos se han concentrado en el componente de rendimiento real, con las expectativas de inflación estables, ya que los rendimientos TIPS a 10 y 30 años han bajado -15 pb y -20 pb, respectivamente, desde las fechas de esos picos en rendimientos nominales (Gráfico 2).
La tendencia a la baja de los rendimientos estadounidenses se ha producido en medio de un explosivo repunte de los datos económicos de EE. UU. Las ventas minoristas subieron +9,8% en marzo respecto a febrero y un asombroso +27,7% en términos interanuales. Las encuestas regionales de manufactura de la Fed mostraron resultados muy robustos para abril, con el índice Empire State de Nueva York alcanzando su nivel más alto desde octubre de 2017 y el índice principal de la Fed de Filadelfia disparándose a un nivel no visto desde 1973. Esto sigue a los muy fuertes datos de nóminas y del ISM de marzo publicados a principios de abril.
Sin embargo, los datos económicos de EE. UU. no son unánimemente positivos. Las últimas lecturas de la encuesta de confianza del consumidor de la Universidad de Michigan y de la encuesta de optimismo de pequeñas empresas de la NFIB se mantienen muy por debajo de los picos previos a la pandemia (Gráfico 3). La inflación anual del IPC subyacente apenas aumentó 0,2 puntos porcentuales en marzo hasta el 1,6%, un movimiento débil en comparación con el repunte impulsado por el efecto base que llevó la inflación anual del IPC general del 1,7% en febrero al 2,6%.
Gráfico 3
Algunos mensajes mixtos de los datos recientes de EE. UU.
Algunos mensajes mixtos de los datos recientes de EE. UU.
Algunos mensajes mixtos de los datos recientes de EE. UU.
Gráfico 4
Menos sorpresas positivas en los datos de EE. UU.
Menos sorpresas positivas en los datos de Estados Unidos
Menos sorpresas positivas en los datos de Estados Unidos
El flujo general de datos económicos de EE. UU. ha sido decepcionante frente a las expectativas elevadas, como lo evidencia la caída casi ininterrumpida del índice de sorpresas de datos de EE. UU. de Citigroup desde su pico en julio de 2020 (Gráfico 4). Este indicador se correlacionaba de forma fiable con el impulso de los rendimientos del Tesoro antes del brote de COVID-19 y ahora, dado el combo alcista de crecimiento derivado del optimismo por las vacunas y el estímulo fiscal, el mercado de bonos vuelve a centrarse en cómo evolucionan los datos de EE. UU. frente a las expectativas y qué significa eso para las futuras acciones de la Fed en materia de política monetaria.
La máxima dirección de la Fed sigue enviando un mensaje coherente sobre la política, sin aumentos de tasas esperados antes de 2024 y sin indicios de cuándo podría comenzar la reducción del estímulo cuantitativo (QE). Sin embargo, algunos funcionarios de la Fed han empezado a mostrarse algo más vocales sobre su nivel de comodidad con la postura de política acomodaticia actual y los riesgos asociados para la estabilidad financiera y la inflación.
La semana pasada, el presidente de la Fed de Dallas, Robert Kaplan, señaló que le gustaría ver a la Fed comenzar a retirar su apoyo a la economía "a la primera oportunidad". El presidente de la Fed de St. Louis, James Bullard, fue aún más específico, señalando que una vez que la proporción de estadounidenses vacunados alcance niveles de "inmunidad de rebaño" del 75-80%, será el momento para que la Fed debata la reducción del QE.
Por el momento, sin embargo, no hay necesidad de que la Fed actúe de forma preventiva.
Nuestro Monitor de la Fed, compuesto por datos económicos, de inflación y de mercados financieros que señalarían presión para que la Fed afloje o endurezca la política, se encuentra en un nivel neutral (Gráfico 5). Nuestro descontador de la Fed a 12 meses, que mide el cambio en las tasas de interés en el próximo año que está implícito en la curva de swaps de tipo interbancario overnight de EE. UU. (OIS), está en 7 pb, coherente con una Fed que mantiene el statu quo. La última lectura de este mes de la Encuesta de Distribuidores Primarios de la Fed de Nueva York (y la Encuesta de Participantes del Mercado) no mostró cambios en la expectativa mediana de largo plazo para la tasa de fondos federales del 2,25% que ha prevalecido durante el último año (panel medio), pese a una fuerte recuperación en las expectativas de crecimiento de EE. UU.
Gráfico 5
Las valoraciones de los UST están algo tensas
Valoraciones de UST algo estiradas
Valoraciones de UST algo estiradas
El precio de mercado del próximo movimiento de la Fed sigue siendo relativamente benigno, sin expectativa de subida hasta febrero de 2023. Esto sugiere que la pausa en la tendencia de aumento de los rendimientos del Tesoro fue esencialmente el mercado adelantándose un poco al precio de rendimientos a más largo plazo más altos. Esto puede verse al observar diversas medidas de valoración. Por ejemplo, el rendimiento forward a 5 años/5 años del Tesoro ahora se sitúa en 2,4%, que está en el extremo alto del rango de expectativas de la tasa de fondos federales a más largo plazo de la encuesta a distribuidores primarios. Además, varias medidas de la prima por plazo en los rendimientos del Tesoro a 10 años han vuelto a niveles por encima de cero no vistos desde el ciclo de subidas de la Fed de 2016-2018, incluso sin que la Fed haya señalado la necesidad de endurecer la política en respuesta al aumento de las expectativas de inflación.
A pesar de estas señales de valoraciones algo tensas a corto plazo para los UST, todavía no hay indicios de que los grandes inversores globales en bonos estén cómodos aumentando su exposición a los Tesoro de EE. UU. Por ejemplo, pese a que los rendimientos de los Treasuries a 10 años (cobertura en euros y yenes) parecen históricamente atractivos en comparación con los rendimientos casi nulos de los bonos del gobierno japonés y los rendimientos negativos de los bonos alemanes, los datos de flujos de capital del Tesoro estadounidense muestran que los inversores extranjeros siguen siendo vendedores netos de Treasuries (Gráfico 6). Es posible que esos compradores extranjeros necesiten más evidencia de una disminución sostenida en la volatilidad de los bonos estadounidenses antes de mover dinero a los Treasuries, donde las pérdidas por duración derivadas de mayores rendimientos podrían anular la ganancia por rendimiento de entrar en bonos estadounidenses.
Aunque las valoraciones están algo estiradas para los Treasuries, los aspectos técnicos parecen muy sobrevendidos. Tanto la desviación del rendimiento del Tesoro a 10 años respecto a su media móvil de 200 días, como la tasa de cambio a 6 meses del índice de retorno total Bloomberg Barclays US Treasury, están en niveles que solo se han visto cuatro veces desde 2010 (Gráfico 7). Las encuestas de posicionamiento de duración a clientes de JP Morgan y el índice de sentimiento de Tesoro de Market Vane también se acercan a extremos bajistas posteriores a 2010. Cabe señalar que ambas medidas alcanzaron extremos aún más bajistas durante la segunda mitad del ciclo de endurecimiento de la Fed de 2026-2018, por lo que existe potencial de que el sentimiento sobre los Tesoro se vuelva aún más bajista una vez que la Fed empiece a endurecer la política monetaria, un escenario que parece cada vez más probable en los próximos 6-12 meses.
Gráfico 6
Aún no hay demanda extranjera por UST
Sin ofertas extranjeras por los USTs (por ahora)
Sin ofertas extranjeras por los USTs (por ahora)
Gráfico 7
Los UST están técnicamente sobrevendidos
USTs Están Técnicamente Sobrevendidos
USTs Están Técnicamente Sobrevendidos
Seguimos esperando que una economía estadounidense robusta y una inflación al alza obliguen a la Fed a comenzar a preparar el mercado en la segunda mitad de 2021 para una reducción del QE en 2022, con la primera subida de tasas del próximo ciclo de endurecimiento llegando a finales de 2022. Dado que ese resultado parece en gran medida coherente con el precio actual del mercado, en medio de aspectos técnicos sobrevendidos, es probable que los rendimientos del Tesoro continúen moviéndose lateralmente al menos durante las próximas semanas. Sin embargo, hay poco que sugiera que los rendimientos han alcanzado techo y estén a punto de entrar en una nueva tendencia bajista, dado el ritmo acelerado de vacunación en EE. UU. que aumenta el optimismo sobre un eventual fin de la etapa estadounidense de la pandemia.
Manténgase defensivo respecto a la exposición a los Tesoro de EE. UU., ya que el aumento cíclico de los rendimientos aún no ha terminado.
Conclusión: La subida sostenida de los rendimientos de los bonos estadounidenses ha dejado a los bonos con vencimientos más largos en una posición de sobreventa. Sin embargo, el impulso subyacente del crecimiento y la inflación sigue siendo bajista para los bonos y es probable que la Fed comience a preparar el mercado más adelante este año para la reducción de las compras de activos en 2022. Mantener una postura defensiva a medio plazo respecto a los bonos del Tesoro de EE. UU. (duración por debajo del índice de referencia y una asignación de país con infraponderación).
Canadá: Rebajar a infraponderación
En un Informe Especial publicado en febrero junto con nuestros colegas de BCA Foreign Exchange Strategy, expusimos el caso para colocar la deuda gubernamental canadiense en "observación de rebaja" en las carteras globales de renta fija.1 Esperábamos que los rendimientos de los bonos canadienses continuaran subiendo junto con el aumento de los rendimientos globales y, por tanto, mantuvimos nuestra recomendación de exposición de duración por debajo del índice de referencia dentro de Canadá.
Gráfico 8
Canadá: Un mercado de bonos de alta beta una vez más
Canadá: un mercado de bonos de alta beta una vez más
Canadá: un mercado de bonos de alta beta una vez más
Sin embargo, concluimos que era demasiado pronto para cambiar a una postura de infraponderación total sobre los bonos gubernamentales canadienses con los casos de COVID-19 aún azotando el país, el programa de vacunación comenzando muy lentamente y el programa de QE del Banco de Canadá (BoC) impidiendo que los bonos canadienses volvieran a su estado habitual de "alta beta" dentro de los mercados de bonos de economías desarrolladas.
Ahora parece que fuimos demasiado cautelosos en ese aspecto.
Los bonos gubernamentales canadienses han sido uno de los mercados con peor desempeño en lo que va del año dentro del índice Bloomberg Barclays Global Government, registrando un retorno en moneda local de -4,1% - peor que el retorno de -3,5% obtenido por los bonos del Tesoro de EE. UU. hasta ahora en 2021.2 Está claro que los bonos gubernamentales canadienses vuelven a ser un mercado más sensible a los movimientos de las tasas de interés globales (Gráfico 8).
En ese Informe Especial de febrero, expusimos tres factores que podrían empujar al BoC a pasar a una postura de política menos dovish, y más bajista para los bonos, más rápido de lo que esperábamos. Gran parte de esa lista ya ha comenzado a materializarse.
1) Buenas noticias sobre el despliegue de la vacuna
Lamentablemente, Canadá está sufriendo una tercera ola de casos de COVID-19 que ha llevado a la provincia más poblada de la nación, Ontario, a implementar el confinamiento más severo visto hasta ahora durante la pandemia. Sin embargo, el ritmo de vacunación también ha aumentado, con la proporción de canadienses que han recibido al menos una dosis siendo ahora del 21% (Gráfico 9), superior al del conjunto de la Unión Europea (UE). Canadá está administrando ahora más vacunas diarias que tanto el Reino Unido como la UE.
El ritmo acelerado de las vacunaciones ya está proporcionando un gran impulso a la confianza económica canadiense. El índice de confianza del consumidor Bloomberg Nanos está en un máximo histórico (Gráfico 10), mientras que la Encuesta de Perspectivas Empresariales del BoC para la primavera de 2021 fue increíblemente sólida. Dos tercios de las empresas de esa encuesta esperan que las ventas superen los niveles previos a la pandemia, incluso con el reciente repunte de casos de COVID-19.
Gráfico 9
Mejora en el despliegue de vacunas en Canadá
Algunas historias bajistas sobre bonos de ambos lados del paralelo 49
Algunas historias bajistas sobre bonos de ambos lados del paralelo 49
Gráfico 10
Optimismo en auge
Optimismo en auge
Optimismo en auge
La Encuesta de Consumidores del BoC del primer trimestre de 2021 mostró niveles similares de optimismo. El 74% de los canadienses encuestados de entre 25 y 54 años planean participar en niveles de actividad social y económica iguales o superiores a los previos a la pandemia una vez que la mayoría esté vacunada (Gráfico 11). Una mayoría neta (18%) de los encuestados planea gastar más en los tipos de servicios "de alto contacto" no disponibles durante la pandemia, como viajes, cine y comer en restaurantes, una vez que la mayoría esté vacunada (Gráfico 12).
Gráfico 11
Los canadienses están listos para divertirse de nuevo
Algunas historias bajistas sobre bonos desde ambos lados del paralelo 49
Algunas historias bajistas sobre bonos desde ambos lados del paralelo 49
Todos los datos de encuestas canadienses envían un mensaje claro: un despliegue de vacunación más rápido conducirá a un gasto mucho más rápido por parte de consumidores y empresas.
2) Señales de riesgos para la estabilidad financiera
El amor de los canadienses, altamente endeudados, por los bienes raíces siempre ha preocupado al BoC. Aunque una combinación de recorte de las tasas de política a cero y el aumento del QE ayudó a estabilizar los mercados financieros canadienses durante el shock pandémico de 2020, también ha desencadenado un nuevo auge de la especulación inmobiliaria. Según la encuesta de consumidores Bloomberg Nanos, el 67% de los canadienses ahora espera que los precios de la vivienda se revaloricen. La demanda de viviendas ha dado un impulso a la economía canadiense a través de un aumento en los inicios de viviendas nuevas (la inversión residencial representa el 8% del PIB real canadiense), mientras empuja la inflación nacional de los precios de la vivienda nuevamente por encima del 10% (Gráfico 13).
Gráfico 12
Un aumento del gasto "de alto contacto" espera a la inmunidad de rebaño canadiense
Algunas historias bajistas sobre bonos desde ambos lados del paralelo 49
Algunas historias bajistas sobre bonos desde ambos lados del paralelo 49
A medida que los hogares canadienses ya endeudados contraen más deuda para participar en otra fiesta nacional de compra de viviendas, el BoC debe ahora preocuparse por los riesgos de estabilidad financiera derivados de un aumento demasiado rápido del valor de la vivienda.
Gráfico 13
Otro auge inmobiliario canadiense
Otro auge inmobiliario canadiense
Otro auge inmobiliario canadiense
En un discurso reciente, la subgobernadora del BoC, Toni Gravelle, señaló que el BoC tuvo que introducir QE en 2020 para ayudar a combatir la disfunción relacionada con el COVID en una variedad de mercados financieros canadienses, incluidos los bonos gubernamentales donde la liquidez se secó.3 Gravelle también señaló que el BoC comenzaría a reducir el QE una vez que quedara claro que los mercados financieros ya no necesitaban el apoyo del QE. Con las acciones canadienses en auge y los diferenciales de los bonos corporativos canadienses cerca de los niveles más bajos de la última década (Gráfico 14), parece evidente que el BoC puede comenzar a reducir su programa de compra de bonos gubernamentales si ya no es necesario y probablemente esté alimentando otra burbuja inmobiliaria.
3) Estímulo fiscal adicional de gran envergadura
El gobierno liberal gobernante de Canadá del primer ministro Justin Trudeau entregó una gran cantidad de estímulo fiscal a la economía canadiense afectada por la pandemia en 2020. En el presupuesto federal 2021/22 anunciado ayer, se introdujo otro gran paquete de gasto, equivalente a 101.000 millones de dólares canadienses o 4,2% del PIB canadiense durante los próximos tres años. El gasto fue descrito como otro paquete de ayuda por COVID, pero incluyó muchos programas a largo plazo como cuidado infantil nacional, aumento del salario mínimo e incremento de las inversiones verdes.
Según las proyecciones del último World Fiscal Monitor del FMI, el "empujón fiscal" para Canadá –el cambio en el saldo primario cíclicamente ajustado como proporción del PIB– se proyectó que pasara de un estímulo de +9% en 2020 a un lastre de -2% en 2021 (Gráfico 15). El gasto anunciado en el último presupuesto eliminará efectivamente ese lastre durante los próximos tres años. Esto proporcionará un gran impulso a una economía que ya probablemente verá un fuerte crecimiento pospandemia.
Gráfico 14
El QE del BoC ya no es necesario
La QE del BoC ya no es necesaria
La QE del BoC ya no es necesaria
Gráfico 15
Ahora no se espera arrastre fiscal en 2021
Algunas historias bajistas sobre bonos de ambos lados del Paralelo 49
Algunas historias bajistas sobre bonos de ambos lados del Paralelo 49
Gráfico 16
Los rendimientos reales canadienses son demasiado bajos
Los rendimientos reales canadienses son demasiado bajos
Los rendimientos reales canadienses son demasiado bajos
Dada la combinación de aumento de las vacunaciones, el repunte de la confianza, un renovado auge inmobiliario y mercados financieros en alza, será difícil para el BoC mantener su configuración de política actual por mucho más tiempo. Este es un banco central que accedió a hacer QE con reticencia el año pasado y numerosos funcionarios del BoC han declarado –incluso en los peores días de la pandemia global– que comenzarían a retirar la acomodación una vez que ya no fuera necesaria.
Los mercados de tasas de interés ya han pasado a descontar un ciclo de endurecimiento completo del BoC. La curva OIS canadiense ahora descuenta el "despegue" (una subida completa de 25 pb) en octubre de 2022, con 163 pb de subidas de tasas descontadas hasta finales de 2024 (Gráfico 16). La trayectoria proyectada de las tasas está por debajo de las previsiones de inflación del BoC hasta 2023. Por tanto, se espera que la tasa de política real implícita canadiense permanezca negativa durante los próximos dos años, aunque el BoC estima que el rango de la tasa de política neutral es del 1,75% al 2,75%, es decir, -0,25% a +0,75% en términos reales después de restar el punto medio de la banda objetivo de inflación del BoC del 1-3%.
En otras palabras, los mercados de tasas de interés canadienses son vulnerables a cualquier cambio del BoC en una dirección menos dovish, como parece cada vez más probable en algún momento de los próximos meses. Nuestro Monitor del BoC se está alejando rápidamente de la zona de "se requiere política más acomodaticia" (Gráfico 17), y la rápida mejora en la situación del empleo canadiense sugiere que el BoC estará bajo más presión para comenzar a señalar un camino hacia la retirada del apoyo de la política. Esto comenzará con un anuncio de reducción de las compras de QE, quizás incluso antes de cualquier señal de la Fed de que hará lo mismo (Gráfico 18). Esto justifica una postura más cautelosa sobre la exposición a la renta fija canadiense.
Gráfico 17
Rebajar los bonos gubernamentales canadienses a infraponderación
Rebajar a infraponderados los bonos del Gobierno de Canadá
Rebajar a infraponderados los bonos del Gobierno de Canadá
Gráfico 18
¿Podría el BoC comenzar a reducir antes que la Fed?
¿Podría el BoC comenzar a reducir sus compras de activos antes que la Fed?
¿Podría el BoC comenzar a reducir sus compras de activos antes que la Fed?
Aunque un anuncio de reducción del BoC antes que la Fed probablemente presionaría al alza al dólar canadiense frente al dólar estadounidense, sería algo con lo que el BoC podría convivir si la economía estuviera ganando fuerza rápidamente, especialmente porque nuestros estrategas de divisas creen que el "loonie" está infravalorado.
Por tanto, estamos rebajando formalmente nuestra asignación estratégica recomendada a los bonos gubernamentales canadienses a infraponderación (2 de 5, ver la tabla en la página 16). También mantenemos nuestra recomendación de exposición de duración por debajo del índice de referencia dentro de las carteras dedicadas a bonos canadienses. También estamos reduciendo la asignación a Canadá a infraponderación en nuestra cartera modelo de bonos y colocando los ingresos tanto en EE. UU. como en la Europa central (ver páginas 14-15).
Conclusión: La economía canadiense está ganando un impulso positivo significativo, con un ritmo de vacunación más rápido que aumenta el optimismo a pesar de una tercera ola de COVID-19. Ahora vemos un riesgo creciente de que el Banco de Canadá cambie a una postura de política menos dovish en los próximos meses, liderado por una reducción de sus compras de bonos. Rebajar los bonos gubernamentales canadienses a infraponderación en las carteras globales de renta fija.
Robert Robis, CFA Chief Fixed Income Strategist rrobis@bcaresearch.com
Notas al pie
1 Consulte el Informe Especial de BCA Research Foreign Exchange Strategy/Global Fixed Income Strategy, "¿La recuperación canadiense liderará o se rezagará respecto al ciclo global?", fechado el 12 de febrero de 2021, disponible en fes.bcaresearch.com y gfis.bcaresearch.com.
2 Ese rendimiento canadiense es prácticamente el mismo después de cubrirse a dólares estadounidenses, por lo que ese rendimiento en moneda local se puede comparar con el rendimiento del mercado de Tesoro denominado en dólares estadounidenses.
3https://www.bankofcanada.ca/2021/03/market-stress-relief-role-bank-canadas-balance-sheet
Recomendaciones
La cartera recomendada por GFIS frente al índice de referencia personalizado
Algunos relatos bajistas sobre bonos de ambos lados del paralelo 49
Algunos relatos bajistas sobre bonos de ambos lados del paralelo 49
Duración
Asignación regional
Productos de spread
Operaciones tácticas
Rendimientos & retornos
Rendimientos de bonos globales
Rentabilidades históricas