Morning Notes — Yields Lower on Schedule

Some of the recent back-up in bond yields reflects high expectations for increased fiscal stimulus/spending.  The unveiling of Biden’s economic plan tomorrow has been sufficiently previewed by the press and likely priced into markets.  An additional coronavirus fiscal relief package is expected to be part of tomorrow’s unveiling with expectations for bi-partisan support probably running ahead of reality.  And yesterday, we discussed how potentially positive Phase 3 vaccine data (from JNJ or NVAX’s UK study) could erode political momentum around increased spending.  Also note that PFE/BNTX recently announced they now expect to deliver 2 billion doses of vaccine globally in 2021 (up from 1.3 billion doses previously) on the back of improved manufacturing efficiencies.

Any yield curve flattening (5-year/30-year spread below ~130bps) would likely be temporary given: 1) the Fed’s commitment to ZIRP and average inflation targeting; 2) fiscal stimulus already in the pipeline; 3) +25.1% year-over-year US money supply growth and; 4) increased pace in vaccinations.