Displaying items by tag: bonds
Goldman Sachs is going on the record warning of “extreme” optimism in markets after stocks’ torrid start to the year. The bank says its cross-asset measure of risk appetite is the highest it has been since 1991 (!). The bank says the risk of losses is higher now, but that in their experience, signals from the macro economy tend to trump signals from risk appetite. Therefore, given that the world’s economy is moving nicely, the market may have more room to run. That said, Goldman is nervous about markets, saying “Risk appetite is now at its highest level on record, which leads to the question of what future returns can be”.
FINSUM: We think this grey-haired bull market still has some juice in it, but our big fear is how hard a recession might hit the markets (given high valuations), not just the economy.
The stock market is very highly priced at the moment and many think we are in the middle of a “melt up”. With that in mind, many are constantly on the lookout for warning signs that the market might be ready to tumble. Well, some are appearing. The big warning sign is that credit spreads are widening and implied volatility is picking up. It is very unusual for this to occur during a rally, as it usually happens during corrections. This warning comes on top of other red flags, such as stretched investor sentiment, and very positive earnings revisions.
FINSUM: The bond market has long been known for leading the stock market, and credit spreads are one of the indicators we tend to take very seriously. Definitely something to pay attention to.
There has been A LOT of talk lately about a bond bear market. The idea is that rates are now in a secular rising cycle led by a hawkish Fed and rising inflation. The issue with that view is two-fold. Firstly, the bond market “experts” calling for the bear market are well-served if it comes true because of the strategies they use. And secondly, there isn’t really evidence of much inflation and the Fed is not looking overly hawkish. The one really worrying thing is that the economy has been performing well, which does lend itself to rising rates and more money flowing into risk assets.
FINSUM: We think all these worries are premature. We have a new Fed chief coming in which now one is sure about, and there just isn’t much inflation. Plus, there are tens of millions of people retiring who will need income investments.
Stock investors may be in for some big upside surprises while bond investors’ hearts may sink. The new tax regime may have a major unintended consequence for bond markets. With the new lower corporate tax rate, many multinationals are likely to repatriate hundreds of billions of Dollars. For the last several years, much of that money has been parked in Treasuries and other bonds. But with the ability and likelihood of reshoring, companies are likely to pull huge amounts of capital out of bonds and put it into stock buybacks and dividends. This could be a big plus for equities, but bond markets could sink as massive amounts of capital are withdrawn.
FINSUM: This is the first convincing argument we have heard for why any fundamental force, outside of the Fed, could bring about a bond bear market.
The media and many bond market gurus would have you think the ceiling is caving in on bonds. Talk of a massive bear market, surging inflation, and big losses abound. How to make sense of it all? The answer, if there is one, is that reversals in rate environments tend to take a long time, and have historically lasted 2-3 decades before reversing back. Therefore, bond yields may continue to climb steadily, but this shouldn’t be bad for the stock market, so big losses may be avoided. In fact, slowly rising rates can spark structural bull markets. It would also be helpful for pension funds to have higher yields as they could be safe in assuming better returns, helping fund the huge national pension deficit.
FINSUM: We just are not that worried about bonds. The Fed still seems fairly timid, there is high natural demand for yields because of demographics, and inflation and growth aren’t all that strong.