Commonwealth

The 10-year Treasury yield has been climbing steadily since hitting a low of 0.5 percent in August 2020. This week, as of April 20, it was close to 1.56 percent. But the rise in rates hasn’t been equal across the broad spectrum of fixed income instruments. If you’re an investor who hasn’t made any changes to your fixed income portfolio since last August, it’s likely your exposures have changed. As a result, your investments may not be delivering the benefits you’re looking for. To assess the situation, take a look under the hood at your fixed income portfolio. But first you need to understand what current interest rates are telling us—and how inflation is involved.

I spent last week down in the Florida Keys on vacation with my family. It was great. The weather was terrific, we went snorkeling and kayaking, and the place we stayed was very nice. Truly relaxing.

I have had a number of questions recently about inflation and what that means for the Fed and interest rates. The general assumption seems to be that inflation is about to rise sharply and that the Fed will be forced to raise rates to control it, with the usual panoply of devastating side effects. The taper tantrum gets mentioned frequently, as when rates rose sharply and derailed stock markets after the Fed suggested it would tighten policy.

As we approach the summer months, there are a lot of reasons for investors to be worried: inflation, taxes, the deficit, and on and on. I am hearing quite a bit about reasons not to be cheerful, some of which we’ve talked about in other posts. But because of where we are in the calendar, there is one more making the rounds—the old market chestnut “sell in May and go away”—that I want to talk about today. The short response to this adage, for readers in a hurry, is “don’t.”

Today, I’d like to provide an update on the coronavirus, including the economic and market implications. We’ve had good news on the medical front, as the fourth wave of the virus doesn’t seem to be gaining traction. Case counts and positive test rates are back to the lows we saw as the third wave subsided, and hospitalizations and death rates have improved. One potential problem is that vaccination rates have slowed, which we will need to keep an eye on.

April was a good month for the markets. The S&P 500 and Nasdaq gained more than 5 percent, while the Dow was up almost 3 percent. These returns were driven, in part, by the medical news, with new case counts, hospitalizations, and deaths all down. While the medical risks declined, reopening accelerated. Job growth rose, and weekly layoffs dropped. Consumer confidence and spending also improved.