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The death of a Treasury Bull Market shakes confidence in the market winners

(Bloomberg) – Stocks may take a breather on Monday, but the aftershocks of the sharpest bond sell-off in nearly five decades will affect investment strategies associated with the cheap money era. Look at the problematic cross-asset links there. Tech stocks are becoming increasingly sensitive to US debt, with co-movements according to Bank of America Corp. are the most negative since 1999. Volatile currencies from the Mexican peso to the Australian dollar have become more susceptible to financial fluctuations. Meanwhile, the short-term link between bonds and the S&P 500 has risen to its most positive level since 2016 – a sign of the growing risk of simultaneous declines in both long-term treasury bulls, strategies tied to the low-interest era , look dangerous. And that increases the prospect of a new sale. “The persistent heuristic is the most powerful force on the market right now,” Warren Pies, founder of 3Fourteen Research, wrote in a note. “The pandemic – and our collective response to it – created this situation.” While the treasury router took place for good economic reasons – juicing deals that set the business cycle – some of the EU’s biggest market winners last year still looks fragile. Take big tech. While they haven’t always shown a positive association with bonds, Facebook Inc. and Netflix Inc. are inherently long-term businesses. As economic growth plunged into the pandemic, investors bought these stocks for their promise of long-term gains that were discounted at record rates. With the US economy expected to grow at the fastest rate since the 1980s, while bond yields rise, the sector has become less attractive – while cyclicals like energy and finance have regained importance. In fact, US technology stocks are now even more vulnerable to higher interest rates than they were during the 2013 Taper Tantrum, when the Federal Reserve signaled a reduction in asset purchases. BofA strategists, led by Andy Pham, wrote in a note: The Nasdaq 100 rose nearly 2% on Monday as government bond yields fell, underscoring the close connection between the two. All of this is a problem for those following US large-cap benchmarks, where technology is easily the clunkiest sector. This is also a problem for a classic 60/40 portfolio. One way to determine the duration risk of stocks is to reverse dividend yields. This is an indication of how long it would take an investor to recoup their original investment if other things were the same. According to Jeroen Blokland, a portfolio with 60% in the S&P 500 and 40% in government bonds would have the highest duration in around two decades: “The duration of stocks has increased steadily over the past ten years, as technology stocks are so weighted was high Long duration stocks have risen to an all-time high, ”the Robeco portfolio manager wrote on the manager’s website. “As a result, portfolio life has increased as both bond and stock durations have increased.” The stock sectors fluctuated more than their historical relationship to interest rates implies over the past month, suggesting the market is pricing in another 10-year yields up 15 to 25 basis points, UBS Group AG strategists, led by Keith Parker, wrote in a note last week. All of this is a headache for some of Wall Street’s hottest products. Kathie Wood’s flagship ETF at Ark Investment Management was one of the best-performing funds in the US in 2020. However, the ARK Innovation ETF, ticker ARKK, is down 20% from its February high after falling from falling interest rates was recorded. also. The duration of the iShares iBoxx $ Investment Grade Corporate Bond ETF (ticker LQD) of USD 43.5 billion rose to a record 10.3 years last year, according to Bloomberg. It’s now down to 9.7 years, with the fund plummeting 6.5% this year due to the rise in government bond yields. In the foreign exchange markets, countries exposed to commodities such as Mexico, Australia and Canada were in the line of fire according to bonds BofA. “The rise in interest rates has contributed significantly to a synchronized risk-off environment for interest rates, stocks and currencies,” wrote strategists in a statement on Thursday. The annual high reached last month. For its part, Morgan Stanley is bearish against emerging market currencies as few central banks are expected to hike rates fast enough to counter the effects of rising US yields, strategists led by James Lord wrote a break from last year when this one Exchange rates caught a break from a depreciating dollar as risk appetite rebounded. The silver lining in all of this? Investment strategies that determine the business cycle take up the backlog. For example, a Bloomberg index shows that a long-short value strategy has been set for the best quarter since 2001: “As long as bond yields rise, value has a chance to achieve performance,” wrote JPMorgan strategists under the leadership by Mislav Matejka For more articles like this, please visit us at bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP

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