The market feels the consequences of the stimulus to debt and interest rates

Both companies and administrations were forced to borrow trillions of dollars to compensate for the drop in income during the period of economic activity restriction due to COVID-19. You might have thought that taking out loans of such an amount would raise interest rates, but Extraordinary interventions by central banks prevented these increases. In the developed world, monetary institutions fully absorbed new public debt issues this year.

What repercussions could there be to such a scheme? The good disposition of the Federal Reserve To buy even high yield credits, it gave investors the peace of mind to seek profitability in the credit markets, which strengthened prices in the fixed income segment.

As described Karen Ward, chief strategist of JPMorgan AM, it is unlikely that central banks will withdraw this type of aid in the near future. “The structural pitfalls facing Europe and Japan in terms of inflation they indicate that negative interest rates and ongoing asset purchases could last at least into 2021, ”he says.

In the United States, the new average inflation target of the Federal Reserve (Fed) paves the way to maintain expansionary monetary policy for a time. The fact that we are entering a period of higher inflation than expected basically delays the moment of expansion in which the Fed could begin to withdraw its aid. “With this, the immediate effect is that a ceiling is created for the 10-year US Treasury bond yields”, dice Ward. And, according to their forecasts, other central banks will adopt similar measures in due course.

To summarize it, one could say that interest rates are likely to remain at these levels for a considerable period of time. In fact, there are suspicions, in the opinion of the experts, that we will experience a less dramatic version of what happened in the postwar period, a period in which the combination of control of the rate curve and financial repression kept interest rates at minimum despite to the acceleration of nominal activity. In this way, the administrations were able to pay off their debt with relative ease.

If inflation is kept in check, policy makers should have no difficulty in fulfilling their role. “On the contrary, if the price of money resurfaces with greater strength than in the last expansive period, there could be some problems”, Highlight the experts from Atlantic Capital. Thus, this risk cannot be ruled out.

The looks at inflation in the debt market

During the latest expansionary period, central banks faced a considerable stumbling block, as both central banks and governments emerged from the recession by concentrating on reducing their debt over several years. They made the decision to step on the accelerator, while commercial banks and administrations stepped on the brakes. “We suspect that, on this occasion, governments will be much more lax in terms of deficit reduction”, opina Ward.

The clearest repercussion of this scheme is aversion to public debt, although it could not be completely ruled out. “If interest rates do not normalize in the coming years, when the next economic crisis hits for whatever reason, central banks like the Bank of England and the Federal Reserve could they have no choice but to use negative interest rates”, Analyzes the expert from JPMorgan AM.

“Making a moderate allocation to long-duration government bonds still seems like a sensible decision as insurance against downsides, given the profitability they could achieve in the event of such a negative rate situation”, Stand out from RBC Capital.

“In this sense, these bonds will suffer if the economic performance is stronger, but in such a scenario, it would be expected that other assets in the portfolio, for example, the actions, will compensate that damage”, concreta Ward.

Dividends and valuations: the focus to follow

Likewise, income-hungry investors also will increasingly depend on stocks from your portfolio to earn dividend income. Of course, in 2020, along with interest rates, dividends were also cut, although the situation has been different depending on the region.

“The UK and continental European markets have been in the eye of the hurricane, as declining dividend payout ratios and increased use of buybacks (which are often halted before companies change dividend policy) have generated a much stronger income stream from US equitiesWard says.

In Europe, having bottomed out in the summer, analysts have revised future dividends sharply higher. The data on sectoral flows, for their part, show that investor interest in dividend-focused strategies it has been on the rise steadily around the world since last August.

Valuations are also attractive, with high-dividend developed market stocks trading roughly two standard deviations below their long-term average valuation relative to growth stocks. “We recommend caution and not relying on historical data to identify the securities that will report the highest dividend earnings: contributions will be more varied for the futureWard concludes.

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