Market Notebook

Equities pulled back into a possible consolidation range last week while bonds came under significant pressure.

Inflation concerns were front and center in market participants’ minds last week, adding to the pressure on bonds. Shorter duration bonds appear to be moving more quickly than longer duration bonds resulting in a flattening yield curve. A sustained flattening of the yield curve could negatively affect credit availability and thus start the real economy down the backside of the credit cycle. If this is indeed where we are in the cycle, then these are still early days. How quickly the cycle progresses is likely dependent upon the perceived inflation threat. Be on the lookout for possible inversion of the yield curve as we progress towards the end of 2021 and into the first half of 2022.

Equities have done well in 2021 thus far. It seems prudent to think about how one would go about immunizing one’s portfolio should credit cycle tightening occur. Given the current environment, my preference is to underweight bonds in the face of rising inflation while overweighting or raising cash methodically. It is still possible to find individual opportunities for investment, while overall, equities appear expensive.

All the best in the week ahead!