Equities are Up on News of Vaccine, What’s Up With Bond Yields?
While the introduction of COVID-19 vaccines should reinvigorate an economic recovery, experts are saying that the vaccines are not likely to persuade central banks from changing their accommodative monetary policies and significantly altering interest rates.
Since Pfizer announced in early November the good news about their trial results, the stock market has steadily responded positively, but the bond market has not. There has not been much change to yields of longer-dated government bond yields.
Typically, when investors become more optimistic, both equity prices and bond yields tend to rise. This is because as the economy recovers and inflation rises, investors expect governments to tighten their monetary policies.
Today, hope about a vaccine has helped draw investors into equity markets, but concerns that the pandemic is entering a new phase that could shut down the economy again is keeping yields anchored low.
Additionally, governments have indicated that they will not raise rates for many years. Some have even modified their policies or views. Case in point, the Federal Reserve adopted a more flexible approach to inflation. It set rates in a range of between zero and 0.25%, and they said that inflation will need to stay above target for a while before it takes action. It is expected that the ECB will take a similar stance.
So regardless of how quickly the vaccines are distributed and how effective they are, many central banks will continue to undertake purchases of government bonds, keeping their yields at or around their current levels. In fact, the ECB plans to expand its Pandemic Emergency Purchase Programme to as much as €2 trillion from its current €1.35 trillion in purchases.[1]
Equity markets may be riding a new wave of optimism, but investors still need to be cautious with so many uncertainties about the vaccine and other economic issues such as another fiscal stimulus.
On behalf of everyone at Toroso Advisors, I’d like to wish you a peaceful, healthy, safe and joyous holiday season. We look forward to sharing a prosperous new year together. Hopefully in person soon!
[1] MarketWatch.com. “ECB to boost its bond-buying program to as much as €2 trillion, Dec. 4, 2020.
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