Despite wobbles in Europe and deceleration in the U.S., the economic outlook remains positive, leading to a rebound in growth over the course of the first quarter into the second. Policy news continues to be good for the global economy. We remain positioned to benefit from riskier fixed income assets outperforming and government bonds underperforming, with duration likely to be a headwind to returns rather than a tail wind, like in 2020. Increased spending in conjunction with greater normalization of behavior should be good for corporate cash flow (earnings will depend on costs), which should be supportive of credit markets. economy stronger, with some of the spending spilling over to the rest of the world. fiscal spending is expected to propel the U.S. soon.ДЄs previously discussed, interest rate/duration risk has not been friendly to bond market returns in 2021 this is likely to continue. The good news is that social distancing restrictions seem to be working in bringing down infection rates, vaccination rates are improving and the Johnson & Johnson vaccine looks likely to be approved for emergency use in the U.S. The emergence of new COVID-19 strains also gives rise to new risks concerning the efficacy of vaccines and the potential continuation of social distancing restrictions further into the future or continued conservatism of households and companies with regard to normalization of behavior. On the other hand, the global economy looks to have decelerated in Q1 due to rising COVID-19 infection rates/hospitalizations, renewed/enhanced targeted social distancing and a slow rollout of vaccinations. not as easy in the eurozone but with euro credit spreads low, most government bond yields negative and, maybe most importantly, with10-year Italian/German bond yield spreads sub 100 basis points (bps), there is little evidence that financial conditions are not propitious for economic recovery. Financial conditions remain very easy in the U.S. The Fed and other central banks are unlikely to enter the fray (meaning commenting or doing something policywise) until the consequences are known. Expectations of low inflation, the pandemic, central bank quantitative easing (QE), and central bank forward guidance are slowing the rate rise, but rising they are. What this means is that the hope/belief that yields on government and other high quality bonds would remain stable and low have been challenged. If the Democrats succeed in legislating these two new fiscal deals, a truly extraordinary amount of support/stimulus will be injected into the economy. These, of course, come on the heels of the $900 billion fiscal package passed just recently. It also looks likely that this stimulus package will be followed by another in the fall of another $1 trillion or more, possibly with tax hikes included. As of early February, it looks like the Democrats will aim to push through another fiscal support package north of $1 trillion. Instead of contentious negotiations with a Republican-controlled Senate, the new administration can use the Congressional budget reconciliation process (the one used by Republicans to get their tax cuts passed in 2017) to push through aggressive fiscal expansion. A Democratic majority in the Senate, combined with the inauguration of President Biden, offers a radical change in prognosis for fiscal policy. The big policy news was of course the implications of the Democratic sweep of the Georgia U.S.

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