A 'great divide' is causing bizarre behaviour from investors

Investors are bucking common wisdom in the face of an unprecedented divide in markets.

Bond yields have collapsed to record levels while stocks hit all-time highs, and that has created a “great divide” in the market according to Binky Chadha of Deutsche Bank.

“In line with the historical pattern, but strongly contrary to popular belief, falling rates have driven massive flows into bonds (+$760 billion above trend) and out of equities (-$1.7 trillion),” wrote Chadha in a note to clients.

This would seem, as Chadha notes, somewhat counterintuitive. Why would you sell stocks that are (in aggregate) soaring to new heights while pouring money into bonds that, at least on the face of it, offer little by way of yield?

For one thing, the stock selling may be indicative that clients are taking profits. If you don’t expect stocks to push much further past the highs, it makes sense to take some profits while you can. This is further supported by the fact that Bank of America Merrill Lynch reported on Tuesday that their clients sold equities for the second straight week, dumping $407 million while the S&P 500 and Dow Jones set records.

It appears that even in stocks, investors looking fot safety. Chadha found that investors were rotating out of seemingly volatile European equities and into “safer” US equities such as defensive sectors with large dividends, described as “bond-like” by Chadha.

Meanwhile, investors are pouring money into corporate and emerging market debt. While this is considered relatively safer than the average stock, investors are searching for at least some yield compared to US government bonds.

Essentially, based on Chadha’s observations, it appears that as we’ve seen the chasm between stocks and bonds grow, investors have decided it may be time to get a bit safer.

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