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On Wednesday of election week, the Federal Reserve Board issued a statement, and the chairman gave a press conference. Let me summarize the Fed’s message in four words: More of the same.
That’s good news for income markets in 2021. It portends more positive returns, comparable to the 7% in 2020 on investment-grade corporate bonds or the 3.5% on Ginnie Mae mortgage pools. Any sense that inflation, interest rates and economic growth will escalate enough to erode bond values is mistaken, even if a viable COVID vaccine revs consumer and business confidence. Look at it this way, says PGIM Fixed Income economist Katharine Neiss, “A vaccine is less inflationary than a huge fiscal stimulus.”