In this issue:

• REITs, commodities and US junk bonds buck the trend with gains this week
• Losses across the board for our four portfolio strategy benchmarks

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Forecasting Bond Risk Premia using Stationary Yield Factors
Tobias Hoogteijling (Robeco Asset Management), et al.
April 12, 2021
The standard way to summarize the yield curve is to use the first three principal components of the yield curve, resulting in level, slope and curvature factors. Yields, however, are non-stationary. We analyze the first three principal components of yield changes, which correspond to changes in level, slope and curvature. The new factors based on changes in yields have strong predictive power for bond risk premia, in contrast to the factors based on yield levels. We also provide insights into the impact this has on the added value of macro data for bond risk premia predictions and the recent conclusion that machine learning provides better forecasts than linear regression.

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* Economists expect strong acceleration in US jobs creation for April
* Eurozone economy contracted in first quarter
* Slower growth for China’s mfg and services sectors in April via PMI data
* Rare and perhaps fleeting bipartisan vote as Senate passes water bill
* Pending US home sales rose less than forecast amid tight supply
* US jobless claims continued falling, dropping to new pandemic low last week
* US GDP growth accelerated in Q1 to strong +6.4%:

The Federal Reserve reports that it expects faster economic growth and higher inflation – two factors that historically have triggered tighter monetary policy. But the Fed is playing a different game this time and announced on Wednesday that it will keep interest rates near zero. Depending on your macro outlook, this is either hopelessly naïve or a clear-eyed view of looking through what some anticipate will be reflationary noise for the next several months.

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* Fed expects faster growth, higher inflation but holds rates near zero
* Biden outlines broad economic plan to Congress
* Eurozone economic sentiment rebounded sharply in March
* SEC chair resigns over possible conflicts of interest
* Vanguard abandons efforts to obtain mutual fund license in China
* US traded deficit reached record level in March
* US Dollar Index falls to 2-month low:

As expected, the Federal Reserve left interest rates unchanged in today’s policy announcement. Despite widespread expectations of faster growth, the central bank reasoned (persuasively or not) that pandemic risk for the economy continues to lurk and so aggressive policy accommodation is still necessary.

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Stay short and favor junk bonds. That, at least, is what’s worked rather well so far this year, based on set of ETFs representing the major slices of US fixed-income markets. But as reflation heats up, is the already stretched high-yield market headed for trouble?

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* Biden today will outline $1.8 trillion proposal in new spending and tax credits
* India’s coronavirus crisis worsens as pandemic breaks health system
* Profits for Google and Microsoft surge as the firms thrive during the pandemic
* Fed expected to maintain aggressive monetary stimulus despite faster growth
* US Consumer Confidence Index rises to 14-month high in April
* Manufacturing growth in Richmond Fed district is steady in April vs. March
* US 1-year housing price increase continued to accelerate in February:

Whatever your view of the higher inflation expectations of late, particularly if firmer pricing pressure persists, it would be a distinct change from what’s prevailed over the past 40 years. Disinflation/deflation (DD) has been a dominant macro factor since Paul Volcker broke the back of inflation in a run of uber-hawkish monetary policy in the early 1980s. Since then, DD reigns supreme, arguably to the point that the policy of promoting this outcome has become a problem in its own right.

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* US population rose at slowest rate since 1930s in previous decade
* California’s governor will likely a recall vote this fall
* UK to send naval flotilla through tense waters in Asia next month
* Tesla reports strong earnings gain, in part boosted by trading bitcoin
* Are ESG market-beating results an illusion?
* Texas manufacturing activity continues expanding at strong pace in April
* US durable goods orders rebounded in March after loss in previous month
* Texas, Florida gains seats via new census data; NY and Calif. each lose a seat: