Sunday, March 30, 2014

What is happening to the stock bond return profile


Bespoke Invest presented a nice simple chart of the difference in stock and bond returns. Now if we can have nice simple anaswer for the why of strong bond performance. Last year it was all about stocks with the bond sell-off focusing on the taper issue. Now we have the taper program and bonds have actually improved. Sell the rumor, buy the fact? 

The flat stock market after a strong run may be expected. The taper program reduces excess liquidity which should slow equity gains; however, the strong bonds gains is a little bit of a mystery.  Weaker growth is one answer. Low inflationary expectations is another although there has not been much change in the inflation protection swaps. Bonds rallies at low rates is something that perplexed JGB investors and looks to be a potential problme in Treasuries. I am unconfortable with the Treasury as hedge negative correlation argument. Weaker equities mean strogn bonds is a statistical relationship not a cause and effect.


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