Eric Hickman: 4th-Wave Of COVID-19 Will Push Rates To Zero

Even though vaccination plans for developed-world adults are firming up, the developing world and children are less clear. As long as the virus circulates in humans anywhere, it will find new optimizations that will likely require vaccine alterations.

The more widespread infections remain globally, the more mutations will occur. A lingering pool of cases in poorer countries risks giving birth to resistant strains that force richer economies to lock down and start vaccinating all over again.

Financial Times, 02/05/2021, “The global race between vaccines and mutations”

Taken together, it is probable that the world will have at least one more severe wave of infections this spring and summer – a fourth wave – before the inoculated and previously infected can crowd out those with no protection. Re-vaccination (booster shots) for new variants add to this timeline.

Rates Will Fall Dramatically

Such isn’t doomsday, but at a minimum, it elongates the time until battered industries (hospitality, entertainment) will have a chance to recover. So far, markets continue to believe the pandemic is a net benefit to bigger businesses globally (all-time highs in public companies, see below).

COVID-19 Wave Rates, Eric Hickman: 4th-Wave Of COVID-19 Will Push Rates To Zero

The explanation for this is that it is only the small, non-public companies that are struggling.

That is far-fetched.

The pandemic will cost the world’s public companies in aggregate at some point. I wrote nine months ago that “COVID-19 Defies Hyperbole.” Even though risk-on markets had gone up when I suggested they would go down, I stand by my prediction. Apt fiscal and monetary injections forestalled a deeper contraction. Still, it is a delusion to think we will get out of this for free – especially in a world economy that was overdue for a retraction anyways.

Even without a fourth COVID-19 wave, the negative impact on jobs, rents, consumer demand, tax revenue, and entire economy segments (hospitality, entertainment) has yet to be considered seriously. As they become so, risk-on markets (stocks, commodities, crypto-currencies, houses, and non-G-7 currencies) will drop, and long-term U.S. Treasury yields will fall dramatically.   

Eric Hickman is president of Kessler Investment Advisors, Inc., an advisory firm located in Denver, Colorado, specializing in U.S. Treasury bonds.

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