October 2021 Monthly Review
Equity markets regained their dominance for the year, posting the best monthly performance of 2021, following the worst monthly performance in September. Economic data came in mixed at best in October, inconsistent with the strong gains in risk markets. Bond market performance was challenged. Yield curve shifts caught investors’ attention as the US curve saw a “bear flattening” environment with short bonds (2-5 years) up over 20 basis points while 30-year bonds fell 11 basis points. The move suggests a belief that inflation fears have peaked, and economic growth is slowing, yet Fed policy is still on track to “pull the inevitable punch bowl away”.
- New Treasury auctions were well received, but global bond markets, FOMC comments, inflation, and economic data made for a volatile month in US rates.
- Investment grade corporate bonds had a modestly positive month led by longer maturities.
- High-yield bonds were slightly negative on the month despite a strong equity market.
- Municipal bonds fell, as relative value is still relatively expensive, but getting closer to fair value compared to taxable bonds.
Inflation fears remained front and center last month as belief in “transitory” inflation theories are waning. Fed Governor Bullard stated on October 4th that he is “concerned with inflation risks to the upside”. CPI and PPI data for the month came in as expected, but a Q3 increase in the Employment Cost Index highlighted wage pressures. Average hourly earnings continue to remain elevated, as reported in the monthly job report.
Markets looked for direction from interest rates and FOMC policy.
- The bellwether US 10-year note topped 1.7%, on October 21st. This level represented the pinnacle of rates in Q121, which brought investment from foreign buyers and countries with persistently negative yields.
- Sell-offs in other developed markets (UK gilts) drove US Treasury yields higher in the middle of October. As the month progressed, long-dated Treasury purchases picked up and rates fell from the recent peak.
- The September FOMC Minutes highlighted that the economic recovery remained broadly on track, and a near-term gradual tapering process was appropriate. Risk markets rallied on the news, as many believe the amount of stimulus being injected into a strong economy is no longer helpful.
- Fed Chair Powell remains dovish - toward the end of the month, he stated “it’s possible, but not a certainty of full employment” in 2022 and suggested that as the Delta variant fades, the US should see growth return to the high levels seen in the summer.
- In the first week of November, the FOMC is expected to begin tapering. Risks remain to their statement around rate hikes, as consensus has already priced in two rate hikes in 2022.
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