Investors Continue Move Back Into Asset Classes Out Of Favor Since COVID

While Federal Reserve Board Chairman Jerome Powell said it was unlikely inflation would remain persistently high and the Fed was not planning on changing its monetary policy in the foreseeable future, we have seen the yield curve steepen a bit at the long-end, with the 10-year Treasury yield closing the Lipper fund-flows week ended Wednesday, January 20, 2021, at 1.12%, after starting the month out at 0.93%.

Last week we talked about the move of fixed income investors toward Inflation Protected Securities and Loan Participation Funds as they adjusted their portfolios to reflect the possible rise in interest rates. However, from a historical perspective, equities have done a better job of offsetting inflationary pressures in portfolios.

Overall, investors appear to be more confident that with a successful distribution of the COVID-19 vaccines, the economy will continue to rebound in spite—and maybe as a result—of a ballooning fiscal deficit as we move toward herd immunity. This should lead to the market experiencing slight inflationary pressures as a result of increasing demand, and could be beneficial and provide opportunity for a broader rally in the markets.

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