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Stocks and Bonds Rally Amid Inflation Retreat

Stocks and Bonds Rally Amid Inflation Retreat

Stocks and Bonds Ascend in Unison as Inflation Concerns Recede

Written by Simon White, Bloomberg Macro Strategist

Stocks and Bonds: A Joint Rise

In recent times, stocks and bonds have been experiencing a simultaneous rise, with investors increasing their holdings in both assets. The specter of inflation, which has been a major concern for investors, seems to be retreating, allowing lower yields to stimulate the growth of stock prices.

Investor Positioning in Equities

Data on investor positioning in equities indicates a growing interest in US stocks throughout the current year. Investors are now net long, a position they have maintained since the end of 2021. This was just before the market reached its peak at the beginning of 2022. However, the conditions were less favorable then, with the CPI at 7% and still climbing, and excess liquidity experiencing a significant drop.

Change of Leadership in Equities

Last week was a good one for equities, as they managed to recover three-quarters of their recent losses. As noted in previous discussions, there has been a change of leadership in the equities market, a shift that typically signals that prices are nearing their bottom.

Stock Rally and Bond Positioning

Stocks have been rallying as yields have seen a drop from their recent high of approximately 4.70%. Bonds, which had been somewhat oversold, also experienced a rebound as a result of weaker than anticipated economic indicators, such as payrolls. This has pushed inflation worries to the back burner. Investor positioning data shows a slight increase in net long bond positioning, indicating that investors are cautiously re-entering the market.

Long-term Outlook for Bonds

Despite the current positive trend, the long-term outlook for bonds remains bleak. Inflation is expected to persist, with leading indicators predicting higher price growth in the future. While stocks and bonds are currently rising together, the downside of this positive correlation is that they could also fall together, undermining one of the main reasons multi-asset managers invest in them.

Banks and Treasuries

Banks have been gradually divesting from Treasuries and agency securities over the past two years, reducing their holdings from 33% of assets to 30%. The latest Senior Loan Officer Survey, released on Monday for the three months ending in April, offers little indication that this trend is about to reverse. The net percentage of banks tightening standards for C&I loans remained constant, following an increase in the quarters since SVB’s bankruptcy. This typically precedes C&I loan growth by approximately six to nine months.

Household Sector: The Last Resort for Treasuries

As the chart below illustrates, banks tend to decrease their holdings of less profitable Treasuries when they increase their commercial loans. This makes it more likely that the household sector will become the last resort for Treasuries. If inflation continues to be an issue, they may demand a higher yield premium to do so.

Article by Tyler Durden

Published on Thursday, May 9, 2024 at 10:00 AM

Wrapping Up

Inflation, stocks, and bonds are all interconnected in the complex web of the financial market. Current trends suggest a simultaneous rise in stocks and bonds, with inflation taking a backseat. However, the long-term outlook for bonds remains less than optimistic, and the household sector may end up being the last resort for Treasuries. What are your thoughts on these developments? Do share this article with your friends and engage in a discussion. Remember, you can sign up for the Daily Briefing, which is delivered every day at 6 PM.

Some articles will contain credit or partial credit to other authors even if we do not repost the article and are only inspired by the original content.

Some articles will contain credit or partial credit to other authors even if we do not repost the article and are only inspired by the original content.

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