We continue our special series on the outlook for the year ahead with a look at the capital markets. What are the moving parts impacting funds flow, asset characteristics (volume, prices, and yields), and quality of deal issuance?

With each passing day, the prospect for lower infection rates improves. Investors expect vaccine distribution to reach a tipping point soon with the US adult population, perhaps earlier than expected if logistical hurdles are overcome. Commercial activity could then resume “normal” levels.

The result of that newfound optimism has been further pressure on interest rates. As our Chart of the Week shows, the ten-year Treasury has stepped up 70 bps or so. At the same time, investors are moving up the Fed’s first anticipated hike date to mid-2024.

Higher rates have had a chilling effect on high-yield fund flows. Reversing from in-bound cash last year, there have been $4 billion of redemptions six of the past seven weeks, per S&P LCD. Bond volume has also eased, from $60 billion last June to $24 billion so far this month.