The U.S. election outcomes and the announcement of several coronavirus vaccines have altered the landscape as the market seems to be looking through to brighter days in 2021. The current spike in coronavirus cases will restrain some activity and slow the recovery, but the bar for data to surprise to the upside has been lowered as well. The recently passed stimulus package should help provide a bridge between now and when vaccines are more widely available and administered.

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The Fed's new flexible inflation targeting framework, which it announced in August, is clearly dovish. This policy will effectively allow the central bank to keep rates at low levels even when inflation meaningfully increases above the 2% target, which is likely to happen in 2021. The potential rise in inflation may be transitory, but it has not been fully priced into longer-term Treasury yields. Given the Fed's ongoing monetary support, short-term U.S. government debt yields are likely to remain very low for the foreseeable future. While short-term yields should remain pegged, we feel that the Treasury curve has some potential to steepen further as continued economic growth should push long-term yields modestly higher.

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While the economic outlook remains positive, growth will likely slow in the near term but may still exceed expectations. Bouts of volatility should provide opportunities, particularly with the view that we will soon transition into a classic early-cycle growth environment. Credit valuations seem less attractive following an extended rally, but substantial monetary liquidity and additional fiscal stimulus could dampen volatility. We continue to look to earn yield in the portfolio, and there are still pockets of the market that were hard hit by the pandemic, such as CMBS and some corporate names, that are attractive.