This has been a very difficult period for bond markets. The long bond has seen a significant sell-off and German bunds have gone for days in only one direction. Let's make no mistake, this is not yet like the "taper tantrum", but it has been a move that has confounded many in the market.
Since the beginning of the year, the Fed has delayed any rate action. Inflation seems to be stable at rates below 2% albeit higher oil prices will change the headline rate. The first quarter was slower than expected, but many view this as a temporary issue. Certainly, growth is not coming in stronger than expected. So what is the reason for the sell-off?
Many have attributed the sell-off in the last day to comments by Chairman Yellen. She stated that equities could be overvalued and bond returns may be too low. She also said that any Fed action will likely be associated with a sharp price reaction. All true, but the markets were already turning lower. It seems that asset prices have disconnected from fundamentals but this time it is on negative side.
What is clear is that bond risk premiums by any measure are very low. Investors are not being compensated for the price risk they may face over the life of the bond. Equity valuations are extended and do not offer anything that would be called cheap. The result is a high sensitivity to deleveraging and a movement to cash. Switching from stocks to bonds makes little sense in this world, so the negative correlation between these assets that we have seen in the past is gone.
Call it the "Yellen Rebellion". Investors do not want to take on risks in this low interest rate environment until they have clarity on the direction of policy. We are not getting that with forward guidance, so the action is to move to cash.
No comments:
Post a Comment