3/8/2021 11:00:00 PM

A Message from Mike: Bond yields race higher

Are higher interest rates looming?

Last year it was deflation, this year it’s inflation. Go figure.

Far from being debonair and suave, the bond market revolted during the month with yields racing higher in a matter of days. What? You mean we can’t have zero or negative interest rates forever? Apparently not when you throw trillions of fresh dollars, euros and yen at the global money supply. Let’s take a brief look at recent history. When QE debuted in 2009, there was grave concern at the time that inflation was coming. However, economists around the world have now been convinced that buying government bonds to reduce interest rates is not inflationary, after inflation failed to materialise post GFC.

Correct, they are increasing the money supply, but they are not spending it on foreign reserves or attempting to devalue the USD. They use those funds to buy long-dated debt. However this time, we have governments in on the act too, creating huge budget deficits to spend their way out of the Covid recession. The US budget deficit for 2020 is estimated to be around 18% of GDP, and 10% for 2021. This compares to a GDP contraction of 3.5% in 2020 and growth forecast of 4.4% in 2021. So, while I do not believe we are at risk of hyper-inflation, it would be reasonable to assume that some inflation will be created and hence higher interest rates will be necessary.

Vaccine takes effect

So why have global markets just cottoned on to this? Because in the last few weeks we have seen Covid cases fall in the US and UK as vaccinations start to have a positive effect on the spread of the virus and hence the belief that global growth will recover sooner than hoped.

Scope for further rises?

So, far from panicking about a Weimar Republic scenario, this is more about interest rates normalising somewhat. Central banks actually want inflation at 2-3%. In summary, I think there is scope for further rises in long-term interest rates this year, perhaps to 2.5% in the US and NZ by year end. However, let’s not forget, we are still experiencing lockdowns and we are most certainly not out of the woods yet! Importantly, central banks will keep a lid on short-term borrowing costs so 1-year term deposits and 1-year mortgage rates will likely remain anchored around the current levels for 2021.

The reality is that easy monetary policy and fiscal stimulus was required to keep us from the abyss. The unintended consequences of this are bubbles in asset prices ranging from Bitcoin to GameStop. Now policymakers have the near-impossible job of exiting this strategy without disrupting financial markets.

Latest performance

The long and short of all this is that February was a tricky month to navigate and after some stellar performance from Pie’s products, the funds paused for a breath. More details on this are in the CIO review and fund updates.

Are you not entertained?

Over the weekend my son was stuck in front of the TV after a wee spill on his mountain bike (no serious injury). During this mandatory movieathon he watched Gladiator, starring none other than Russell Crowe of course. I was reminded by Zach that this movie is 21 years old now so the CGI looks pretty ropey, but I think it still holds up as one of the greatest films of all time, hence receiving 12 nominations and five Academy Awards. I didn’t sit through the whole film. I’ve already seen it a number of times, and we’d already watched Ready Player One. But I drew a parallel from Maximus’ quote early in the film. After gorging a score of other gladiators single-handedly, he looks up to the crowd, which is stunned to silence, and says, “Are you not entertained? Is this not why you’re here?”. Investing is not for the faint-hearted. It’s filled with blood, guts and glory. I’ve had more investing surprises in the last 12 months than I’ve had over my whole 20+ year career. I can finally say 20+ years now, it makes me feel a bit more like a seasoned veteran. But it’s true, is it not? Volatility, riots, pandemics, crashes, bubbles and manias. You name it and I can cite an example. It’s certainly entertaining and captivating to be a part of.

Investor Series 2021

Our Investor Series events start in April at venues around the country. You can find details here and we look forward to seeing you all there.

Growth 2 Closure

As we mentioned last month, our Australasian Growth 2 Fund will close to new money on 31 March 2021. This is another example of Pie’s ongoing commitment to performance. The fund will continue to be managed in the same way with no change to the existing strategy. If you have any questions, contact your Relationship Manager.


As always, thank you for your support. If you have any questions please don’t hesitate to call me on
(09) 486 1701, or email me, [email protected]

Mike Taylor, Founder and CEO

Information is current as at 28 February 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.