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Monthly Cash Review - July 2021

With July’s headlines focused on the Delta variant and the potential impact on the economy, the Federal Reserve’s (the Fed) views on the economic reopening and subsequent further impacts on their QE program and inflation concerns did not shift materially during their FOMC meeting.

Thus far the surge in confirmed cases of the Delta variant does not seem to be impacting economic output or market sentiment. Equity markets continue to surge with the S&P 500 Index and the NASDAQ maintaining their year-to-date high valuations, while investment grade and high yield corporate indices have come off their beginning of month tights. US Treasury yields also portray a slightly more cautious outlook as the 10-year yield touched a three-month low of 1.19% on July 19th before closing at 1.22% on month-end. Why are yields so low? Chair Powell had this comment: “In terms of what’s been happening in bond markets, I don’t think there’s a real consensus on what explains the moves between the last meeting and this meeting. We’ve seen long-term yields go down significantly. Some of it is a fall in real yields, which may have been connected to sentiment around the delta variant and concern about growth. There was also some decline in inflation compensation, which has significantly reversed. And there’s also so-called technical factors, which is where you put things that you can’t explain.” Perhaps 10-year yields are pricing in unforeseen risk in the economic reopening or perhaps just recognizing that inflation concerns should not be as high as some previously believed. Although the reopening has run into challenges, we can see how certain inflationary pressures are subsiding (e.g., lumber prices) and unsustainable (e.g., used cars).