The fixed-income market’s unblemished record of striking fear into the hearts of equity traders is in danger.
With rates on two- and 10-year Treasuries up a sixth straight week, and payouts on cash at or above the earnings yield of the S&P 500, stock investors are barely registering a shrug. Benchmark US share indexes just posted their biggest runup in a month, climaxing Friday with a jump in the Nasdaq 100 that topped any since early February.
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Why peace is breaking out in risky assets during a week that at one point saw yields in the entire Treasury market rise above 4% is a mystery Wall Street has no easy answer for. Charts may be one reason: the S&P 500 bounced sharply after falling below its 200-day average on Wednesday. Another may be that investors are interpreting elevated rates as a sign strong economic data is likely to persist, says Chris Zaccarelli at Independent Advisor Alliance LLC.
“It’s interesting to see stocks whistling past the graveyard,” Zaccarelli said. “Stock investors may be looking for yields to drop as a sign we are going to have a recession and are seeing an all-clear in the sense that rates are higher.”
The indifference to calamity on display in stocks was particularly vivid as the week ended. Friday’s 1.6% gain in the S&P 500 pushed the Cboe Volatility Index below 19, testing lows hit when equities surged at the start of the year. A basket of most-shorted stocks rose 3.2% — it’s fifth straight advance — while a gauge of unprofitable technology companies vaulted almost 6%.
It’s happening even as money cascades out of stock-focused ETFs and into fixed-income funds, as risk-free yields reach multi-year highs. Short-dated Treasury bills are enticing investors as yields push above 5%, eclipsing the payout on everything from profits generated by S&P 500 companies to those offered by the traditional 60/40 portfolio of stocks and bonds.
But while the trade is touted as risk free, it comes with opportunity costs. Grasping for a 5% yield right in an S&P 500 bear market strikes certain money managers as an iffy proposition.
Read the full article here by Vildana Hajric, Katie Greifeld, Advisor Perspectives.
