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Financial Markets Get Vaccinated

The big news of last week was Pfizer’s announcement that their vaccine was 90% effective against COVID-19. It also appears that some vaccines could be distributed before year-end.

The market’s response? “This is a gamechanger.” Stocks soared to record highs and mortgage-backed securities and Treasuries prices fell sharply, causing rates to rise.

Markets Tend to Overshoot

Stocks and Bonds tend to overshoot to the upside and downside in response to market-moving news, and last week looks like another example.

Last Monday, when the Pfizer announcement was made, the Dow Jones almost hit 30,000, and since that time has actually lost several hundred points and is well off the best levels of the week.

Rates also endured a similar response with the 10-year yield rising to .98% on Monday, well up from .71% just days before. By the end of the week, the yield settled above .90%, off the highest levels but still a big rise week over week.

The Vaccine Will Be a Headwind for Bonds

Besides Pfizer, there are many more firms close to an effective vaccine. So, over time, we should expect more ways to combat the virus and allow our economy to fully open. While the financial markets may have “overshot” with its initial response to the vaccine, the trend of more progress and economic expansion is bad for Bonds and rates.

Stocks and Rates Were Not the Only Things That Rose

An effective vaccine can’t come soon enough. This past week, daily COVID-19 cases and those currently in the hospital hit record levels. This alarming trend has many states paring back their re-opening strategies and reinstituting fresh restrictions. Should we see deeper restrictions that cause uncertainty and/or economic harm, Stocks, and rates may experience volatility and decline from current levels.

More Help Is on the Way

Despite the high uncertainty in politics, a new stimulus package is coming to help many in need. The size and scope of the stimulus is not clear, but will likely consider the current rise in cases as well as the effects of a widely distributed vaccine.

More stimulus is not necessarily good for Bonds and rates because it lifts inflation expectations, adds more Treasury supply to the Bond market, and helps continue economic expansion.

Bottom line: Rates are just above all-time lows. With a vaccine and more stimulus on the way, it may be difficult to see rates improve much, if at all.


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