The strong economic backdrop, sharp rebound in demand year-over-year, good corporate earnings reports, and positive vaccination and economic reopening trends in the US were drivers for risk markets in April. This month was also the first positive month for fixed income strategies to date in 2021.
Inflation worries continue, despite the Fed’s continued stance of the “transitory” nature of current inflation gains. While the FOMC remains dovish, a growing number of institutions believe the committee will soon change its tune.
The Biden administration announced bold, transformative plans including a large infrastructure bill and plans for increased capital gains taxes and taxation of wealthy households. While plans gave some initial pause to markets, the enormous “tax and spend” will be negotiated in Congress. Economic data and positive vaccine momentum overshadowed the potential change in tax code.
While fixed income markets rebounded, consensus is that interest rates will continue to march higher and investment-grade risk premiums are low. Treasuries found some solid footing, and corporate and municipal bonds outperformed once again. This was unique given equities notched their best performance month of 2021.
- The S&P 500 index rose 5.34%, led by the NASDAQ, up 5.43%.
- The US benchmark Treasury 10-year note fell from 1.742% to 1.628% during the month.
- The 30-year Treasury bond had renewed interest from both direct and indirect bidders at the beginning of the month which helped the recent steepening trend in bonds.
- Corporate bonds had even more contraction as company earnings came in quite strong.
- Municipal bonds continued to defy historical ratios as President Biden’s tax plans drove buyers to all sectors of the tax-exempt market.
- Ultra-short Treasury notes and money market securities remain compressed close to zero.
- A new Treasury bill was auctioned at a yield of 0.00% as the flood of liquidity to money market securities continues.
- Longer duration bonds outperformed shorter bonds for the first month in some time.
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