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Our views 26 April 2021

JP’s Journal: Economic cycles

5 min read

JP was away last week, recharging his batteries with a well-deserved walking holiday. In his absence, I’ve stepped in with some observations from my own R&R activities.

The two most prominent fixed income themes so far in 2021 have been the Covid reopening, with the vaccination programme rollout promising a return to a ‘near normal’ by the third quarter; and the return of inflation (or at least the return of the fear of inflation) pushing yields sharply higher.

There are still headwinds to recovery, but most people now believe that we’re moving in the right direction. Inflation is more moot. There are very strong global factors at play, including: the Biden administration’s vast fiscal packages; supply chain friction with pandemic-related shortages of essentials such as computer chips and shipping containers; and very powerful base effects as the recovery runs up against last year’s collapse in global demand. As an example, last April saw Brent crude dipping below $16 a barrel – one year on, it’s nudging $70.

There’s also a lot of talk of inflation being driven by consumer spending, in particular consumers using the savings they’ve built up over the last year. On my bike ride up to and around London last Saturday, I saw evidence of current spending behaviour, some of it perhaps savings led. Cycling through Tooting, Balham and into Clapham, the longest queue of people I saw was for a barber. I observed an even longer one near Elephant & Castle (which, by around midday, had turned into one of the longest high street queues I have ever seen). The second-longest queue of the day (next door to the barber’s) was for an outdoor bar. Along with numerous shorter queues for local grocery stores, these all made sense. While I cannot imagine savings (or low prices) had anything to do with this behaviour – just desperation, relief and necessity – it is possible that such businesses could take this opportunity to raise their prices.

The queues in central London were more interesting. The longest was for Selfridge’s, in contrast to no queues whatsoever outside any of the more value-focused stores on Oxford Street. More surprisingly, there was a queue of five or six people outside the Hermes store at the top end of Sloane Street. Even more surprising was the queue of at least 20 people outside Cartier. Perhaps there were sales on at these stores but, even if there were, I doubt any of the items would be considered low price. These queues made me wonder where most of the saving has been going on, and whether high-end luxury is where the spending boom is likely to be focused, in which case I cannot imagine it will be particularly inflationary.

Number crunchers often say that “the plural of anecdote is not data”, but they are misquoting Ray Wolfinger. The political scientist actually said: “The plural of anecdote is data.” One man’s cycling observations may eventually aggregate into inflation data. In a way, the market got there before me – the surge in bond yields in January and especially February eased by March and it seems that the inflation picture will prove more nuanced than was initially feared. While yield levels should still rise gradually as growth continues to recover, corporate bond investors focused on income, with perhaps a focus on shorter duration, should not be put off.

Cash, government bonds and currencies

On Friday, the Office for National Statistics (ONS) reported that UK government borrowing was over £300bn for the year to March. While obviously high – with commentators again rolling out the “highest level of borrowing since the Second World War” line – it was significantly lower than feared a few months back, when around £400bn was forecasted. The £250bn increase in borrowing comprises £200bn of extra spending and the rest is from a decrease in tax revenues, although these have been very resilient. The economy has been far more robust in this lockdown than in the first as businesses and consumers have found ways to operate within the restrictions.

Sterling was firmed against the US dollar, but slightly weaker against the euro. Cash markets remained quiet as there is still a lot of cheap money available and therefore little issuance. Even when there is issuance, very rarely is a name paying where we believe it should be.

Gilt yields were lower across the board, with ultra-long yields softening in particular. US 10-year government bond yields were unchanged at 1.57% with longer-dated yields softening slightly. The euro area remained relatively weak with yields moving higher as the ECB meeting was largely a non-event – as examples, 10-year French yields went positive and Italy was notably weaker.


Sterling credit spreads were steady, although tightened slightly to 0.92% as investors again adopted a more ‘risk on’ mindset. The sterling and global credit markets remained in a post-Easter lull with limited issuance and activity.

High yield spreads also tightened slightly over the week, consolidating recent lows. There was an array of interesting deals: an Andean telecom tower company, a French frozen-food company and a cannabinoid producer among others, but none of these proved a fit. Instead, our activity focused on buying attractive short duration candidates as the yield curve continues to be persistently flat. We remain very bullish on global high yield.

Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are the author’s own and do not constitute investment advice.