Quarterly Investment Review: Q4 2020
Global equities gained in Q4 as a number of vaccine breakthroughs fostered hopes of a return to economic normality (whatever new definition that may have). Government bond performance was mixed, with US yields rising (meaning prices fell). Corporate bonds gained ground. Commodities gained on vaccine news and a weaker US dollar.
US equities gained over the quarter, with November especially strong due to the vaccine news. The developments eclipsed Joe Biden’s win in the US presidential election, as well as a $900 billion stimulus package announced in late December. The Federal Reserve nonetheless reinforced its supportive message, stating it will continue with current levels of quantitative easing.
The short end of U.S. Treasury yield curve was unchanged during the quarter as inflation remained low and the Federal Reserve stayed on the sidelines. Yields on longer maturities drifted higher on deficit concerns. Until the economy is fully healed from the pandemic, expect interest rates to remain low. .
Given the sharp decline in UST yields due to Federal Reserves policy actions, fixed income portfolios will continue to experience investment income erosion due to lower reinvestment yields for the foreseeable future. Shorter maturity portfolios will see this negative impact sooner and more acutely than longer maturity portfolios.