BMA Market Insights: Yield Curve Steepens as COVID-19 Vaccines on the Horizon


Market Snapshot

The USD interest rate swap curve has the front end increasing slightly by 4/10ths this morning while 10-years are 2.8bps lower to 0.951%. The curve has continued to steepen over the past few weeks, on inflation growth expectations, with the 2-year and 10-year swap spread widening to 72bps within the past two weeks pushing up the cost of some hedging strategies that utilize options.

This week, U.S. markets will be focused on the U.S. Food and Drug Administration review of the Pfizer/BioNTech vaccine on Thursday and whether the $908billion coronavirus relief bill can garner bipartisan support to move forward to the finish line. In the EU, Thursday will bring a European Central Bank policy decision where we may see increases to its pandemic fueled quantitative easing program amidst the backdrop that the UK-EU Brexit trade agreement could imminently fall apart.

U.S. Jobs Growth Slows

The slowdown in U.S. non-farm payrolls growth has helped push Congress to renew efforts of a fiscal stimulus deal before the winter recess. Last Friday’s sharp slowdown of only a 245,000 gain in November employment, compared to 610,000 gained in October, underlines the severity of the renewed coronavirus surge and the resulting restrictions are weighing on the services sector which will likely intensify this winter. 

  • Government employment fell by 99,000.
  • State and local education fell by 21,000.
  • Employment in the hospitality sector rose by just 31,000 last month, after increasing by close to 300,000 the previous month. 
  • Retail employment declined by 35,000 as more stores went online. 
  • Logistics industry related employment in transport and warehousing increased by a strong 145,000.
  • Manufacturing employment rose by 27,000.

OPEC+ Reaches an Agreement but for how long?

After several days of being at a standstill, OPEC+ finally managed to reach a compromise and extend most of the production cuts that have been in place since April 2020.  As part of the agreement, the group will gradually return 2 million barrels per day and allow for a monthly reassessment of market conditions beginning next month. 

With the $908 billion coronavirus aid bill gaining momentum and the possibility of an approved vaccine in the coming days, many oil market participants bought on the news raising Brent crude oil futures to nearly $50 a barrel.

The thesis that a COVID-19 vaccine will drive a significant recovery in oil markets in the near term may be misguided as a recovery in oil prices will bring U.S. shale refineries back online. With Libyan production continuing to ramp up amidst growing internal strife amongst OPEC+ members, especially Saudi Arabia, the UAE, and Russia., H1 2021 looks to be a volatile market in oil. Brent is trading 0.89% lower this morning to $48.8 per barrel.

Weighing heavily on the broader market are:

  • U.S. fiscal stimulus package
    • A $908 billion fiscal-aid package is currently being negotiated, though Congress remains split on the legislative language let alone what the package lacks. 
    • Should the significantly smaller fiscal stimulus package fail to pass, we will unlikely see a revisit until late Q1 2021.
  • U.S.-China relations, as both countries fight on everything from trade to defense issues, monetary policy, and the coronavirus. 
    • The Trump administration banned investments in companies controlled or owned by China’s military. Current investors will have until November 11, 2021, to comply with the ruling that goes into effect on January 11, 2021.
    • Relations will unlikely thaw under the Biden administration as Biden has stated he would not make “any immediate moves” to scrap the 25% tariffs on China — though he has emphasized his commitment to a multilateral approach.
  • COVID-19 Impact
    • The Pfizer/BioNTech vaccine may be approved by the FDA as soon as Thursday with people formally receiving shots within 24-hours. 
    • Meanwhile, the number of COVID-19 cases continues to rise and hospitals across the country are in various stages of being at or near capacity.
    • While there are numerous COVID-19 vaccines and therapeutics on the horizon, the limited production capabilities, timing, and acceptance for people to receive the medical solutions are of concern and could be drawn out towards the end of 2021.