Blue Wave.
The Democrats’ win in the Georgia run-off election cemented the party’s majority in the US Senate and House of Representatives, clearing the path for larger fiscal spending under President-elect Biden. Accordingly, expectations for US inflation in 5 years have increased above 2% and 10Y US-treasury rates increased above 1%. We believe there is more space for US treasury rates to widen, however, we think the FED will counter steer and ultimately compress US real rates further into negative territory.

Vaccine Developments.
Vaccine rollouts have finally started worldwide, with Israel leading the race for population vaccinated per 100 people, currently at 20.08 per 100 people. The US and UK continue to lead other European countries, showing rates of 2.99 and 2.44 respectively. However, rollout speeds need to be significantly improved to ensure herd immunity thresholds can be met within reasonable timeframes. According to our projections, if the US were to increase vaccine rollout to 10 million people per week from late January, it could cover high priority groups (people aged 65+) by late February and 75% of the total population by mid-November. The UK can achieve similar results if it improves its rollout speed to 2 million doses per week, as advocated. Overall, we are seeing encouraging progress as most countries around the world are speeding up their vaccine rollouts.

2021 Outlook.
For 2021, we think of a framework with 4 potential scenarios: 1) Growth: Risk-on fuelled by either the re-opening or fiscal stimulus, 2) Liquidity: Additional central bank support, 3) Recession: Risk-off led by a worsening virus and 4) Tantrum: Central banks turn hawkish sooner than expected.

The world is shifting from liquidity to growth with record high fiscal stimulus in the US, which is expected to deliver an additional 2-4tn, and we see markets already fully pricing the liquidity scenario, with tech stocks at their highs and interest rates at their lows. However, and although we believe central banks will lend continued support, we are wary of a pullback led by a worsening virus. To position accordingly, we continue to reduce our cash credit exposure or substitute with convertible bonds. For the reflation scenario, our base case, we have added optionality in travel, oil and banks and position for wider US rates on the back of fiscal stimulus.

To read more on our latest views, please see our Silver Bullet | The New Bond Vigilantes or visit our Insights section.