With vaccination programs worldwide well underway, the spotlight has shifted now to the nature of the economic recovery. The combination of the fiscal packages in the pipeline together with the impending release of pent-up demand has brought forth the possibilities of economies overheating. In response, monetary authorities remain vigilant providing grounds for steady growth in the shadow of the uneven and lingering pandemic risk.
In many ways, the markets have anticipated the recovery as evinced by a sharp increase in rates over the last months. US has led the way, with a recovery projected to be the strongest in decades and a sharp steepening of the curve, with the Fed committed to not raising rates in the short term. ECB has followed suit in maintaining the cautionary stance. While concerns remain due to hiccups in the vaccination programs within EU, inflation expectations have crept up as well. Compared to Q1, sovereign bonds reflect the increased term premium across all regions in our investment universe resulting in higher expected returns.