Increased Vaccine Distribution & Further Stimulus
March 30, 2021 | Cameron Parkhurst
The COV-19 stimulus/vaccine camp is still battling the bond vigilantes to some extent. Over the past three weeks we have seen a slight bit of steepening, but really a bit of calmness in fixed income markets. Outside of the 5-Year Treasury spot, rates have just had a parallel shift up, but there seems to be continued developing news each day.
The Suez Canal fiasco has a buzz stirring about the potential for more, albeit temporary, shipping-related inflation in some sectors should cargo be logjammed for more than a week or two. This is likely a short-term event in the grand scheme of things but could have implications going forward on the path of global shipping. With the Ever Given now freed and moved, Bloomberg reported today that there is a backlog of at least 421 ships awaiting canal transit, and its typical capacity is 50 ships.
This chart, which many in the shipping community follow, is very telling. One small error or mechanical failure should not put a stop on global trade. The Suez Canal serves 10-15% of shipping commerce, depending on which analyst that you talk to. There will likely be ongoing discussions after this event to evaluate safety valves for supply should events like this happen again in the future.
Source: Vessel Finder
With that discussion in mind, the more important long-term story is the efficacy and distribution of the COVID-19 vaccine. It has giant implications on various markets and stimulus programs moving forward. Our home state, GA, recently lowered the age to16 years old to qualify for vaccination. FL is moving to 15. Even states like NJ and NY are moving to 40 and 35, respectively. There is still banter of the better efficacy rate of the Pfizer two-dose vaccine (90+%) vs. Johnson and Johnson at closer to 75% (single dose). The Moderna vaccine seems to come under a bit of fire by analysts, as their dosage has potential blood clot side effects. However, Moderna’s efficacy rate seems in line with Pfizer. We will see how this plays out, but importantly, every week we are seeing more of the US and global population with doses on board. Business Insider reported recently that one third of all Americans have received at least the first dose. Additionally, there are reports that many Universities will be requiring students to be vaccinated before returning for the Fall semester. These are both good things to control this virus. Everyone wants the virus stabilized. As analysts and market participants, we see significant implications.
For every positive point, there is a negative. Today, according to the People’s Vaccine Alliance, one third of survey respondents, which included epidemiologists, virologists, and infectious disease specialists, stress that they believe a new version of the COV-19 vaccine may be required due to variants. Many of these emerging variants have been seen to be more transmissible and not as easily controlled by vaccines. This is to some extent alarming. In the same breath, however, these scientists indicated that the only way to get the virus, mutations or not, under control, is through global vaccination protocols.
Source: Centers for Disease Control
Outside of this discussion about variants, a rosy picture being painted of economic acceleration (stimulus effect) and the Fed having to step off the gas here shortly. As a firm, we like long term charts and graphs. We saw this chart by JP Morgan/Bloomberg and think it is telling. It shows that market traders and analysts have almost always been forward on their skis in relation to Fed moves. Perhaps this is them trying to step ahead of the Fed? The tag line goes “Never Fight the Fed”. Based on that saying, and in listening to them directly, late 2022 through mid-2023 could be the timeframe for the anchor to be lifted off the cash/short-term fixed income markets. Thus the timing of both rate moves and other Fed policy like tapering asset purchases, plays into an important part of the equation regarding where we invest on the curve.
There is still much to be evaluated about governmental stimulus, both looking backward and hypothesizing about what the future might hold under the Biden administration. After the second stimulus round had been mailed to families, there was immediate banter about a new round of $3+ trillion in stimulus. This package seemingly has much more infrastructure spending, but also some more helicopter money. The plan includes tax increases, especially for those above $400K of income. Some analysts debate whether the tax effects will completely offset any stimulus effect. We are awaiting a more definitive proposal before weighing in with our opinion. If infrastructure stimulus does come, that could benefit municipal and taxable municipal markets to some extent, depending on how it is structured. The big question, though, is will even more stimulus foster greater inflation?
When also looking at global bond yield levels, the US continues to be “high yield”.
At some level, this will perpetuate buying pressure, especially relative to many countries selling debt at negative to sub-50 bps yields.
Sources: Tullett Prebon, Tradeweb ICE
The markets have been stable here and we have been holding the course in continuing purchases of primarily municipals and taxable municipals, depending on state of residence and tax bracket. With the shape of the yield curve, there is a discussion in play to sell some short-term bonds in favor of intermediate term, but not severely lengthening duration. We continue to favor higher quality and short to intermediate term duration.
As always, we hold ourselves out there to be your ultimate fixed income resource, so please do not hesitate to reach out with any questions or needs. If you would like us to review any portfolios, do credit reviews or have discussions on any of this data, please call or email us.
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