The fixed-income market’s perfect record of making stock traders nervous is in jeopardy.
Rates on two-year and ten-year Treasuries have been going up for six weeks in a row, and cash payouts are at or above the earnings yield of the S&P 500. Still, stock investors don’t even seem to be able to give a shrug. Benchmark US stock indexes just had their biggest gains in a month. On Friday, the Nasdaq 100 had the biggest gain since early February, which was the peak of the week.
Wall Street doesn’t know why there is peace in risky assets during a week when yields on the entire Treasury market rose above 4% at one point. The S&P 500 rose sharply after falling below its 200-day average on Wednesday. One reason may be that charts show how the market moves. Chris Zaccarelli of Independent Advisor Alliance LLC says that another reason could be that investors see high rates as a sign that strong economic data is likely to keep coming.
Zaccarelli said, “It’s interesting to see horses whistling past the graveyard.” “Stock investors may be looking for yields to go down as a sign of a coming recession, but the fact that rates are going up is giving them the all-clear.”
As the week came to an end, it was especially clear that stocks didn’t care about disasters. The Cboe Volatility Index dropped below 19 because the S&P 500 went up by 1.6% on Friday. This is close to the lows that were reached when stocks went up at the beginning of the year. A basket of the most shorted stocks went up by 3.2%, making it the fifth time in a row that it went up, while a measure of technology companies that aren’t making money went up by almost 6%.
Even though money is pouring out of stock-focused ETFs and into fixed-income funds because risk-free yields are at their highest levels in years, this is still happening. As yields rise above 5%, short-term Treasury bills are becoming more appealing to investors. This is because they pay out more than anything else, including S&P 500 companies and the traditional 60/40 portfolio of stocks and bonds.
But even though the trade is said to have no risk, it costs something else. Some money managers think it’s risky to try to get a 5% yield right in an S&P 500 bear market.
Said Robert Tipp, chief investment strategist at PGIM Fixed Income-
“That short rate isn’t going to be at those levels forever — it’s probably going to end up lower,” “What we’ve seen over long periods of time is that the long-term assets outperform cash. And we have every reason to believe that’s going to be the case.”
The SPDR Bloomberg 1-3 Month T-Bill exchange-traded fund (ticker: BIL) has returned about 2% over the past year, while the SPDR S&P 500 ETF Trust (SPY) has lost 6.3%. But in the last ten years, BIL has been flat, while SPY has gone up by 165% during an epic bull run.
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Said Liz Young, head of investment strategy at SoFi-
“There’s much less ‘opportunity cost’ than what we’re used to because it’s a place where you can get paid while you wait, but there’s not long-term price potential like in equities,”
“So for people with more than a five-year time horizon, you still need equities in the portfolio to set you up for compounding returns.”
When it comes to bonds, investors are warning people to be careful because yields may be at their highest point. In the past few weeks, traders have been putting more money on the idea that the Fed will eventually have to raise rates above 5% to stop inflation. This has caused yields on all Treasury bonds to go up, but traders expect the Fed to stop raising rates by September.
Tipp talked about the 1970s, when both stocks and bonds were at risk because of inflation. Even though the economy was still weak, stocks went up as growth slowed and rates leveled off and then went down.
“There’s a good chance that that kind of cyclicality is going to make its way through the markets, and people that lock in at the short term, exit the long-term markets and go into short term are going to suffer,” he said. “Their long-term returns are not going to be as high because the cash rates will probably move lower.”
Analysts say that cash-like positions are a good place for investors to wait out any turbulence caused by the Fed’s path because they offer a safe haven and steady returns.
David Spika, president and chief investment officer of GuideStone Capital Management, said in an interview, “I do think we need to take advantage of the higher yields on the short end of the yield curve and wait out this continued volatility.” “Then, at some point, we’ll hit bottom, which will be a great time to re-risk. Take that money out of cash and put it back into stocks, and you’ll do well.”
The yield on six-month Treasury bills is about 5.1%, which is the highest since 2007. The earnings yield on the S&P 500 is about 5.3%. That’s the least bit of good news for stocks since 2001.
Even though bond yields look good right now compared to stock yields, Josh Emanuel, chief investment officer at Wilshire, which manages about $90 billion, said that investors take a risk by allocating to cash because they don’t know what that yield will be in the future.
“So, cash may pay you 4.5-5% today, but in one year that may not be the case, in two years that may not be the case”
He said in an interview.-
“The challenge in allocating to cash is that while you’re not taking any duration risk and you’re not taking any credit risk, the risk that you’re taking is the opportunity cost or the uncertainty risk associated with what that cash will pay you in the future relative to the yield you can lock in over the longer-term by moving out further on the yield curve.”
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