Summer began with choppy markets as the FOMC gave markets a small pivot at their June meeting. Fed Chairman Powell surprised markets by slightly altering his “talking about talking about raising rates” rhetoric. However, within a trading session, the Federal Reserve message was softened, by both Chairman Powell and other FOMC members. The “transitory inflation” message was re-introduced to the market and stocks resumed their climb as interest rates nearly dropped to the lowest yield of 2021.
The “curve flattening” throughout Q2, suggests the bond market is buying into the theory of a “transitory inflation” environment, rather than a long-term global inflationary environment. Treasuries were positive for each month of Q2. The US benchmark 10-Year Treasury fell in June from a 1.60% yield to a 1.44% at month-end.
Credit ruled bond markets once again - risk premium spreads have moved to extremely low levels in some cases. Both high-yield and IG corporates outperformed sovereign debt. Supply remained light, and financial bonds saw new risks as companies raised dividends and pledged to start buying back stock (both unfriendly for bond markets).
US economic data continues to support a strong summer and inflation data remains strong. While retail sales data and some housing indicators have cooled a bit, the service sector remains strong and consumer confidence soared last month. First-quarter GDP was reported at 6.4%, some estimates for the second quarter have topped 10%, and employment numbers are predicted to keep growing.
Main catalysts to markets continue to be the vast liquidity from a “dovish,” patient Fed, and anticipation of infrastructure plans from the Biden administration. More important to risk assets has been the lifting of Covid-19 restrictions as Americans get back to “business as usual”. Equities continued to move higher in June, the S&P500 ended the month up 2.33%, and up 15.24% for 1H2021.
Fixed income strategies saw their third straight month of positive performance. While rates remain higher on the year, second-quarter was an improvement for fixed income.
Piton continues to offer customized portfolios and solutions to meet your needs through all market and interest rate environments. Please let us know how we can help you and your clients, we are here to serve as an extension of your team.