Low long-term bond yields in the face of a Fed that is hiking short-term rates has helped sustain one of the greatest yield reaching episodes on record. As the WSJ explains, a reversal in sentiment is all it would take to drive yields back to more normalized levels, likely leading to an unwind in the trade. Not a comfortable foundation to build one’s retirement portfolio upon. On a related note, stay tuned for a post explaining why investors assuming today’s inflated stock market valuations are justified by low long-term bond yields have it wrong.
It has been “TINA” for the last seven years. That means “there is no alternative” but to buy stocks with bond yields so low. But the danger is that shareholders now will return to their jilted first loves of cash and bonds as yields rise.
Stock markets have provided a flavor of the risks ahead as bond yields jumped over the past two weeks. In the eurozone, where the bond moves started, financials are the only sector that have managed to rise, as banks benefit from higher yields. In the U.S., yields haven’t risen quite so rapidly, but financials, up 4.2%, are way ahead. The only other sectors in the black—industrials and materials—moved just positive after Friday’s solid jobs report.
Two weeks is a short period to assess anything, but the pattern fits the menace of a breakup with TINA. If investors bought stocks because bond yields were so miserable, they are likely to sell stocks when bond yields perk up and the logic of the hunt for yield goes into reverse.
Just how big the danger is will depend on what happens to bond yields, of course. But it will also depend on why yields rise, and the latest reason is concerning.
Read more here.
Jeremy Jones, CFA
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