The elusive great rotation from bonds to stocks is finally happening.
About a decade ago, investors started a big shift in their asset allocations away from bonds and into stocks. That prompted calls that bond funds would experience an even greater exodus that would end the bull market.
But the long-term rally in bonds kept going for several years until, arguably, the 2016 US election. Bond yields rose to multi-year highs and their prices fell as investors bet that President-elect Donald Trump’s administration would begin a shift towards fiscal stimulus, and reduce the Federal Reserve’s need for aggressive monetary policy.
The promised fiscal stimulus was expected to be reflationary for the US economy, reducing the attractiveness of bonds.
At the same time, investors’ bets on a lower regulatory burden and corporate tax reform pushed stocks, notably those in the financials sector, to all-time highs.
And the chart that Deutsche Bank’s Torsten Sløk shared in a note on Tuesday titled “Great rotation from bonds to stocks is here” captures this shift:
“Since the US election in November the total market cap of world stock markets is up by $3trn while the global market cap of world bond markets is down by $3trn,” Sløk said.
“While some of this is driven by the appreciation of the dollar, this great rotation roughly suggests that all the money that was taken out of bond markets since the US presidential election was put to work in the stock market.”
It could also be argued that the bull market in bonds ended not in November, but in July. The 30-year bond yield’s drop to a record intraday low of 2.08% on July 11 made that day the most significant of 2016, said Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch, during a press briefing earlier in December.
But an extended period of geopolitical uncertainty in 2017 could send investors rushing back into US Treasurys, which still offer comparatively higher yields and safety to some other government bonds.
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