Monday Musings: March 1, 2021

Mar 01, 2021

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Public Trust Credit Team
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Last week's Treasury yield episode draws comparisons to the Taper Tantrum of 2013

Last week, yields on the 10-year Treasury increased to their highest level of the pandemic, reaching over 1.50% from a low of 0.7% in October of 2020. The move in the 10-year yield, a broad measure for economic expectations and equity valuations, was caused by a material drop-off in investor demand ahead of last week’s auction. The climb in yields showed similarities to 2013’s Taper Tantrum when the Fed announced it was going to begin tapering its quantitative easing (QE) policy, though on a much smaller scale. Yields have come back this week, causing the equity markets to rally, but the drop in demand does draw concerns for the issuance that will result from the $1.9 trillion stimulus currently under consideration by the Senate. We expect the stimulus to come with large issuance on the longer end of the treasury curve which, without a stronger demand picture from investors, could cause another jump in yields. Some market participants also see the rise in yields as a response to higher than expected forward inflation expectations, signaling that some investors believe that the “lower for longer” Fed positioning may not be realistic if the economy begins to realize higher inflation due to fiscal stimulus. The Fed struck a relatively dovish tone at the last meeting and we have not reassessed our expectation on the direction of rates, but the rise in Treasury yields ahead of a large planned stimulus will undoubtedly spread some volatility to markets in the coming months.

Structural reforms for money markets gaining traction… again

Over the weekend, Federal Reserve Governor Lael Brainard presented at the Institute of International Bankers conference and spoke to the importance of shoring up the money markets. While only the latest mention, it suggests that the topic will become increasingly important over the coming months. Due to the importance of the money markets to both the Federal Reserve and the Treasury, there is a near-continuous dialogue about structural reforms, particularly after periods of market disruptions as seen during the COVID-19 pandemic. According to one estimate, nearly 30% of all prime style AUM was redeemed during March 2020; this triggered Federal intervention, leading some to believe that the Federal government will step in during times of market turmoil. To combat this perception or perhaps obviate the need, the President’s Working Group on Financial Markets published a report in December 2020 that offered the following suggestions:
 
  • Remove the tie between Money Market Fund (MMF) liquidity and fee and gate thresholds
  • Reform conditions for imposing redemption gates
  • Minimum balance at risk (MBR)
  • MMF liquidity management changes
  • Countercyclical weekly liquid asset requirements
  • Floating NAVs for all prime and tax-exempt MMFs
  • Swing pricing requirement
  • Capital buffer requirements
  • Require liquidity exchange bank (LEB) membership
  • New requirements governing sponsor support
Over the coming months, we expect a dramatic increase in the frequency of reports on these topics and believe there may be some impacts on all money market participants.

U.S. manufacturing continues to expand in February

American manufacturing as measured by the ISM Purchasing Managers Index continued to expand, growing to 60.8 from January’s 50.7 (the ISM is an absolute measure with readings above 50 representing growth). Demand continues to be strong, with new orders and new export orders indexes both seeing their strong growth continue thanks to increases in consumption. The supply side continues to support demand with shares of customers reporting their inventory as “too low” declining to its all-time low of 32.5% and the order backlog segment reporting a 4.3% growth. Employment remains a challenge for manufacturers as panelists continue to lament difficulties in attracting and retaining talent. We expect that raw materials inputs will continue to constrain manufacturing growth as the survey indicated inputs remain constrained by supply chain issues and scarcity that we have also seen flow through to increases in the pricing index. Overall, February’s data points to solid growth downstream that continues to be affected by upstream scarcity.

Johnson & Johnson receives emergency use authorization for its COVID-19 vaccine

The COVID-19 vaccine candidate developed by the Janssen Pharmaceutical Companies of Johnson & Johnson received emergency use authorization (EUA) from the U.S. Food and Drug Administration (FDA) over the weekend. The approval makes it the third EUA vaccine in the U.S. along with those developed by Pfizer and Moderna. The decision was based on the company’s most recent clinical Phase 3 study that demonstrated an efficacy rate of 85% and is a single-dose shot (Pfizer and Moderna are both require two-doses). Additionally, the Johnson & Johnson vaccine can be stored in a standard refrigerator at approximately 36-46 degrees Fahrenheit for up to three months though new data suggests that the Pfizer and Moderna vaccines can also be stored at higher temperatures than once thought. The single-dose and standard refrigeration required for the vaccine improves the logistics for reaching less-developed communities and some demographics disproportionally impacted by COVID-19.
 
Johnson & Johnson anticipates delivering more than 20 million doses to the U.S. in March and approximately 100 million doses through the first half of 2021. According to recent data by Bloomberg, more than 241 million doses have already been administered throughout 103 countries, with the latest rate of approximately 6.7 million doses per day. In the U.S. alone, more than 75 million doses have been given with an average of 1.7 million doses per day.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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