Plunge into Treasury makes the rebels around the markets


A step in a rage Return the Treasury repercussions in global financial markets, propelling the actions of fast-growing technology companies to new records and reducing business loan costs, but raising a new concern about the prospects for financial returns.

An investor consensus that has taken months to build, meaning that robust economic growth and high inflation will lead to substantially higher interest rates, if shared, and the pain for those keys in that trade is increased with the movements in the two days passed.

Across Wall Street, investors are immediately forced to think about how to reposition themselves on the bottom of what Jim Caron, a portfolio manager at Morgan Stanley Investment Management, described as a “peak of growth, a peak of ‘inflation is a peak of political stimulus’.

The market has picked up its momentum from signals that the Federal Reserve has considered cutting its monetary support earlier than previously expected and appears likely to raise rates in the long run to prevent inflation from escaping. Meanwhile, with the United States easing most of its coronavirus pandemic restrictions – and with the most transmissible ones Delta variant now prevalent in the country – strategists see less scope for growth to surprise on the side.

The yield on the 10-year Treasury bond, which peaked at 1.77 per cent in March, fell 0.11 percentage points in just two trading sessions this week and fell briefly below 1 , 3 percent on Thursday.

“The cost of money is decreasing and people are looking for places to implement that money,” Caron said. “This supports broader asset markets.”

Equities: A register is an inversion of a rotation

The U.S. S&P 500 benchmark has hit eight highs in the last nine trading days, and Apple – the index’s largest company – closed at a high on Wednesday, its first high since January. of a profitable farm Thursday.

In fact, parts of the fast-growing business like Apple have been leading the market rally since inflation expectations peaked in May, reversing what had been a multi-year rotation of values, which fortunes are more closely linked to the economic cycle.

Year-over-year returns on growth stocks in the S&P 500 outperformed returns from stock values ​​Tuesday after lagging for most of the year.

The S&P 500 technology index was down less than 1 percent between the beginning of the year and mid-May. But it has since risen more than 15 percent until the end of Wednesday, with shares of Microsoft, Salesforce and Qualcomm all up more than 10 percent. Value stocks have been weighing water since mid-May.

The bar graph shows the return of S&P 500 sector prices as inflation expectations peaked in May (%) showing technology stocks in full market rotation

Banks, in particular, are lagging behind as interest rates have fallen and investors have begun to question the sustainability of the U.S. economic boom. The long-term drop in Treasury yields threatens the profits banks earn from lending to customers, a point reflected in the closely followed KBW banking index, which has fallen 5 per cent since mid-May.

“The market may be at a major inflection point,” said Margie Patel, portfolio manager at Wells Fargo Asset Management. “There is a feeling that after the middle of the year the fabulous recovery growth that we have had will slow down.”

This nervousness about the economic recovery came to light in early trading on Thursday in a broad stock market sell-off that caused the S&P 500 to open more than 1 percent lower.


“We don’t expect inflation and rotation businesses to return to their former glory,” said Oliver Allen, market economist at Capital Economics, adding that there was “a limited scope for growth expectations to improve. further “.

Graph of year-over-year performance (%) showing U.S. growth stocks pick up value from value

Corporate obligations: the time to charge on debt?

The corporate bond market is dancing in the same vein as the Treasury market.

As government bond yields rose earlier this year, so will higher-quality debt yields in the corporate bond market – albeit by a smaller amount. Now the sharp investment in Treasuries has sent a quality of investment the performance of the corporate bond at its lowest level since February, according to data from Ice BofA Indices.

Margaret Kerins, global head of fixed income strategy at BMO Capital Markets, said she expected much lower loan costs to encourage a number of companies to exploit the bond market.

“If you haven’t issued it yet, you’re going to jump on it now,” he said. “How can you not take advantage of that?”

Some investors and analysts grow cautiously, as credit extends to increasingly risky companies at low rates.

This week BlackRock lowered its outlook for high-yield U.S. bonds, warning that the potential yield on the offering was too low to offset the risks involved in lending to such qualified companies.

The yield on sweeping debt has fallen below 4 percent in recent weeks and this week has recorded its lowest reading since ICE BofA Indices began tracking data in 1992.

Others, while cautious, remain optimistic about the resilience of U.S. markets against a supportive growth fund, even as they expect rates to pick up some of their pace and rise later this year.

“Markets are like pendulums. They go too far in one way and then too far in the other, ”said Adrian Miller, chief market strategist at Concise Capital Management.“ We’re going too far in March worrying about inflation. We are too complacent today. ”

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