I’m not going to lie. I had a lot of trouble coming up with the substance for today’s article. There have been developments since I wrote two weeks ago, but that hasn’t really changed some of the things I’ve said before. I still see inflation as a problem and I still see investment opportunities in a select few areas. What does an increase in yields mean?
The Federal Reserve
The one new piece of information that is worth noting is that the FED has indicated that if the information supports their narrative, they will decrease their asset purchasing program later this year.
That’s a very significant piece of news and the market knows it. Yields increased immediately, only by 7 basis points, or .07%. That may sound like a small move, but in a couple of minutes, that’s HUGE.
Two weeks ago I mentioned the possibility of mask mandates and stay-at-home orders. I thought that the Delta variant was causing enough worry and panic that this could happen.
In the United States, we have not seen any stay-at-home orders, but we have seen mask mandates and vaccination requirements. Outside of the U.S., however, we have seen a crackdown on domestic and international travel.
There’s a possibility that we see more stay-at-home orders as the Delta variant continues to spread and increase the number of Covid cases.
With the threat of inflation becoming more poignant and stay-at-home orders becoming more likely, what are the investment implications?
When it comes to inflation, the short-term effects will be much more dramatic and noticeable than the long-term effects. I think a rise in inflation and a drying up of liquidity will have broad, negative effects throughout the financial system.
An increase in yields will cause bond prices to drop. An increase in yields will make servicing that debt more expensive, so it’s likely R&D spending will go down. It could also negatively affect sectors that rely on borrowing.
There’s also a chance that people will save more. An increase in yields means the interest rate for their savings account will go up, making saving more attractive.
An increase in yields could also cause a migration from “riskier” assets to assets deemed less risky.
Only time will tell what inflation will look like, how the FED will respond, and what the implications will be.
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