Analysis: Falling US bond yields could spell the end of “reflation” stock trading

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The Charging Bull or Wall Street Bull is pictured in the Manhattan neighborhood of New York, New York, United States, January 16, 2019. REUTERS / Carlo Allegri / File Photo

NEW YORK, July 8 (Reuters) – Stock investors are watching dramatic moves in the Treasury market for clues to the fate of one of this year’s most successful coins – the so-called reflation trade that helped push up the shares of economically sensitive companies after nearly a decade of underperformance.

Investors have crammed into stocks of power producers, banks and other companies that are expected to benefit from a strong economic rebound earlier this year, while betting that Treasury yields, which move in the opposite direction of prices, would increase.

That trade appears to be faltering now as concerns over slowing growth push yields to their lowest level in more than four months. As stock markets appear placid, with the S&P 500 hovering near an all-time high, a sub-surface rotation has accelerated in recent weeks, as investors ditch economically sensitive names and revert to big tech and tech stocks. growth that has driven markets up for most of the past decade.

“If we see a further decline in interest rates, if we go below that 1.3% level in any way, that will confirm that growth relative to value has returned and that it has not. isn’t just a fake, ”said Matt Maley, chief market strategist at Miller Tabak.

The S&P 500 has gained 7% since the 10-year Treasury yield hit a recent high in mid-May. A glance under the hood, however, shows signs that a change in stock leadership may be taking place. The Russell 1000 Growth Index (.RLG) has gained more than 13% since mid-May while the Counterpart Value Index (.RLV) has climbed around 1.5% over the same period .

“We don’t expect reflation and spin trading to return to their former glory,” while materials and energy stocks are likely to be held back by falling commodity prices, Oliver noted. Allen, market economist at Capital Economics, in a note to clients. “The big turnaround boost resulting from the reestablishment of risk appetite and rising growth expectations may be largely over,” he said.

Concerns about the economic impact of the Delta variant of the coronavirus and falling commodity prices are helping to push bond prices up. At the same time, the Federal Reserve surprised many investors last month with a hawkish turn that suggested two interest rate hikes by 2023, questioning its commitment to let inflation soar for a while. time.

A key question for investors is whether recent signs of rising inflation – including the latest data on existing home prices, which showed them in April at their fastest pace in 15 years – will be short-lived. duration.

Federal Reserve officials last month estimated that further progress in the US economic recovery “was generally considered not yet to have been achieved,” but agreed that they should be prepared to act if inflation or other risks materialized, according to the minutes of the central bank policy meeting in June. Read more

“The market before the last FOMC meeting assumed that the Fed was comfortable with an inflation overrun, but it became clear that the extent of their comfort with an overrun has declined significantly,” Mike said. Sewell, portfolio manager T Rowe Price, who expects the 10-year Treasury to have already hit its highest level of the year.

The relative calm in equities does not mean that equity investors are immune to growth concerns.

BlackRock Inc (BLK.N), the world’s largest asset manager, said in its mid-year investment outlook on Wednesday that it had reduced its position in U.S. equities to neutral, in part due to forecasts of lower profit margins for companies. L2N2OJ1BS

Meanwhile, a survey of JP Morgan clients showed that net bearish bets against Treasuries fell to their lowest level since late April in the week through July 6, while bullish positions were at their peak. higher since late March, suggesting there may be little fuel for further downward movement. in yield.

“It will be interesting to see how the positioning unfolds to see if there is enough erosion to make the market cleaner and just more fundamentally focused,” said Chuck Tomes, associate portfolio manager at the Manulife’s global, multi-sector fixed income team. Investment management.

Reporting by David Randall and Lewis Krauskopf in New York Additional reporting by Saqib Iqbal Ahmed in New York Editing by Ira Iosebashvili and Matthew Lewis

Our Standards: Thomson Reuters Trust Principles.


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