The reflation trade is in full swing, but not everyone thinks it's time to ditch interest rate sensitive assets

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If there’s been a prevailing theme in global markets in recent months, it’s been the rotation of capital out of bonds and into stocks.

It’s been a pronounced move in such a short period of time, leading some to suggest that the 30-year bull market for bonds is now over.

They’ve been sold off aggressively, pushing both yields, and stocks, higher.

The reflation trade, as it has now become known, has clearly been embraced by investors, buoyed by the belief that US president-elect Donald Trump’s fiscal stimulus plans will lead to faster economic growth, higher inflation and, as a courtesy of both, higher US interest rates.

While some share that view, believing the move since the US presidential election is just the start of a substantial rotation that could last years or even decades, not everyone is willing to call the death of the bond market rally.

Bob Dickey, technical analyst at RBC Capital Markets, is one who’s unwilling to make that call just yet, making him a contrarian of sorts given raucous optimism expressed by some other market analysts.

He points to the chart below to justify his view.

It’s the 10-year treasury bond yield dating all the way back to the mid-1800s, and, as he’s highlighted on the right of the chart, yields — even with the recent spike higher — remain firmly entrenched in the downtrend that’s been in place since the early 1990s.

Dickey says there’s technical resistance found at the 2.5% and 3.0% levels, “which will likely limit the upside movement over the near term”.

It’s the latter figure that he’s watching closely, suggesting that this would need to be broken in order for the lower trend of the past 30 years to be changed.

Until that level is broken, Dickey says that the overall longer-term trend for yields continues to be down, and recommends that investors stay in their interest rate sensitive investments.

Some food for thought, particularly given recent market moves have been largely built on the expectation that economic growth, inflation and interest rates will move higher.

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