Market Commentary: Inflation concerns | Rising US bond yields

25 February 2021

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning, discuss the latest global events and their impact on the markets.

In this episode,

  • Inflation concerns are creeping in [01:51]
  • When will ERAA® reduce its exposure to Gold? [3:30]
  • Rising US bond yields [5:43]


Philipp | 00:01

Hello and welcome everyone to another weekly market commentary from StashAway. Freddy, our Chief Investment Officer is with us, as always. Freddy, how are you?

Freddy | 00:09

Good morning, Philipp. A lot has happened, a lot of reversals. I'm sure we have a lot of questions today.

Philipp | 00:18

Yes, we do! Right, obviously, since last week, we've also seen Bitcoin reach all-time highs. It's pulling back a little bit again, in the early start of this week. So maybe a lot of people got spooked there a little bit after, you know, everyone was speaking about it again, quite highly. That's one thing. But also, we have heard for the first time this month, obviously, from the Federal Reserve, right? Just want you to give a little bit of a quick recap of what was said and how did that impact the markets so far?

Freddy | 00:49

Well, the Federal Reserve didn't really impact the markets because they sort of... The key thing in the testimony was they're going to keep their strategy until the economic outlook truly improves. And as we knew, the Fed has moved from a spot targeting an inflation to something based on an average inflation. And, you know, that means they also didn't clarify what the window is for measuring average inflation. Which means that they have a lot of leeway to let inflation run and hide before bringing in the average up before they do something. So, I know there's a lot of inflation talk in the market, bubble talk in the market, but the Fed seems to be not so concerned and seems to be maintaining that monetary stimulus, maintaining the support based on where the real economy is; not based on where we think the market is. So I think that's reassuring to investors last night.

Philipp | 01:51

Absolutely reassuring on that front. You already kind of mentioned it, but obviously inflation concerns are starting to creep up, right? There has obviously been, the last 2 weeks in the US, with the winter storm, right? We had Covid. We had supply chain disruptions all of last year. Where's that leading to and are those inflation concerns warranted when you think about those?

Freddy | 02:14

Yes. You know, before we all go ahead and blame the central bank for inflation and not thank them for saving the markets last year, I would say that you've got to disentangle some of the inflation we are seeing now from what monetary printing is bringing. Number 1, the COVID-19 situation itself has led to some supply disruptions in many different places. We've seen that with emerging markets where they are also agricultural exporters. So the OECD agricultural price indices have actually gone up quite a bit. So that's one of the triggers for why people were concerned. But that's not related to money printing. It's really transitory in nature because it goes away when we reopen the economies again and we have great vaccine progress now. So there are a lot of transitory factors like that. The prices of metals were the same. You'll find that prices of luxury watches have gone up because of metal prices. But again, that's transitory. And once it reopens up, it goes away. So in a way, we're not really there, but people are just getting a little bit uneasy about the anecdotal evidence in their lives.

Philipp | 03:30

With that being said Freddy, let's get to the questions. We have two really good ones that we wanted to pick out this week, right? One that's going into that direction of the inflation. But start with the first one. It was Wngkai91, probably wrong, but that's the person asking us a question and he's saying, "Thank you for explaining the function of Gold and all the previous episodes. Just curious, what will it take for ERAA®, Economic Regime-based Asset Allocation (for people who don't know, it's our investment model) to reduce Gold exposure in the future. Specifically, what are some key indicators, economic ones, that might contribute to that?".

Freddy | 04:10

Thank you, Wngkai91 for the very interesting question. So, to take it away is basically the reverse of everything we see, which means that, you know, we added Gold because of unprecedented monetary stimulus. That's why we have more, that means, as the Fed starts withdrawing their stimulus is when you need to reduce Gold. In principle, the indicator that would come true is when you look at the valuation of the US Dollar. For example, against its economic fair value, as soon as the number starts looking cheap and starts turning around, the US Dollar restrengthens, the Gold exposure will have to be reduced. So it's actually a currency or a dilution of paper money sort of angle, we are saying this. And also as the economic recovery strengthens and let's say momentum in the leading economic indices that we mention often, the Conference Board LEI, that number starts going up a lot, with a lot of momentum. It may also trigger a change in strategy where we go to a small growth and hence, we move away from more protective assets, right? So that itself would also result in some reduction of the Gold exposure. So it really depends on currencies, economic growth - their rate of change.

Philipp | 05:43

Absolutely great question, Wngkai91, lots of people are probably asking the same thing. Freddy, last question for the day from KP Low. He's saying, "Hey, Phillip, Freddy, given that the US Treasury yield for 10 years, raised recently from 0.917% to 1.37% for the month, January-February and the 30-year is now at 2.16%, which is near to the previous January 2020 prices just before COVID. Is that taper tantrum happening right now and the majority are moving the money into bonds. Is that what you're seeing? Do you have a different point of view on that, Freddy?"

Freddy | 06:22

The taper tantrum happened back in May 2013, where the 5-year government bond yields in the US went up by 1 full percentage point. If you use that as a benchmark or metric to measure the tantrum today, what we're seeing is about 36.6 basis points. So that's about 35%, let's say a third of it that's happening today. So I think we are far from taper tantrum, but the difference is that, this time, the rise in longer term rates are actually more acute. For example, 10-year versus 5-year, 10-years has gone up 84 basis points, right? During taper tantrum, it was twice that number. So we're halfway to the taper tantrum. If we use 10-year, a third of the way, if we use 5-year yields, it's really hard to say, but it's got a lot to do with the upcoming debate, the upcoming likelihood of the Biden White House being able to pass a $1.9 trillion still-fresh stimulus package. So it's sort of like those packages have to be financed, right? Has to be... Somebody has to pay for it. And it's the future generations that's paying for it. It will be paid for. It would be through long-term debts. So that's why the long-term yields are rising more than the short-term yields, right? So, in a way it's really supply tantrum rather than a taper tantrum, because taper tantrum means the central bank at that time was perceived to be withdrawing stimulus and scaring the markets. This time it's actually a bond supply issue rather than the taper issue if I'm clear.

Philipp | 08:10

Yes, you were clear Freddy. Thanks for that explanation as well. And thank you to both of them for asking great questions. Keep them coming, as always, in the comments section below or send us an email to We also have another webinar coming up for our Malaysia audience, that is on Investment Basics. It's on Wednesday, March the 3rd, 6pm to 7pm. The link is in the show notes below, and look out for any other events for Singapore as well as the Middle East region. We always have new events coming up, so either I will be announcing them next week or you can always go to our website as well. Freddy, thank you again for being here, as always. Thank you all for watching. And we'll be back with you again next week. Until then, have a great week. Bye-bye.

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