--Equities and Treasurys are seeing simultaneous rallies
--But stocks and bonds are driven by two different expectations
--Ahead of next Fed meeting, bad data could fuel optimism for stimulus
NEW YORK (Dow Jones)--Stocks and Treasurys are thriving at the same time, contrary to their typical relationship of traveling in opposite directions. The departure from normal market movement reflects just how divided investors currently are about the U.S. economy's health.
Equities investors are optimistic that the Federal Reserve will implement more stimulus to support the struggling economy, while bond-market participants are skeptical the central bank's actions--if any--will be enough. This is causing investors to buy both Treasurys and equities at the same time, something that doesn't usually happen over an extended period.
"We have a disconnect here," said Eric Green , chief U.S. interest-rate strategist at TD Securities . "Bond guys are a bit more cynical, and when I look at the equity market, I see something slightly different--they are more hopeful."
Those sentiments played out perfectly in August: Though the S&P 500 plummeted after the U.S.'s credit rating got downgraded, it roared back the past couple weeks. Treasury yields, meanwhile, which move inversely to prices, had the biggest single-month drop of the year.
That's radically different from the more traditional relationship between the two that held true for most of the summer, when mounting fears about the economy sparked selloffs in equities and sent a healthy bid into U.S. government bonds. It's not unusual for time-tested market dynamics to shift like this when the global economy shows signs of heightened stress.
Analysts say that when equities and Treasurys investors butt heads, bond markets often provide a better gauge for the underlying health of the economy. Equities are heavily influenced by company earnings and sometimes-whimsical consumer sentiment, while bond investors adhere more to economic fundamentals-- that makes them the more-grounded-in-reality bet.
The 2008 global financial crisis is a good example. The Treasurys yield curve, a measure of how much extra return investors demand for holding long-term debt, flipped to an inverted slope in early 2007, something that usually signals forthcoming economic weakness. Equities rallied for another eight months before finally selling off.
"Earnings outlook and revenue outlook can only go so far, but the fundamentals that the bond market trades off of goes a little deeper," Green said.
There are few reasons to think this trend will wear off during the coming weeks. It further solidified Tuesday after the latest Federal Open Market Committee minutes were released--equities jumped because the board left the door open for more stimulus. Bonds also jumped because Treasurys investors reacted to the fact that policy makers reduced their expectations for U.S. growth.
The minutes came after Fed Chairman Ben Bernanke's much-watched Jackson Hole, Wyo ., speech a week earlier, when he didn't shed any specific light on the Fed's next moves.
"The equity markets are embracing a hope for some type of action that will prod risk asset prices higher, while the skeptics in the bond market fret that monetary policy has limited ability to push growth onto a higher trajectory," said Chris Ahrens , UBS's interest-rate strategist.
In the weeks heading into late-September's two-day Fed policy meeting, analysts say bonds will continue enjoying safe-haven buying in an economy that's still rife with uncertainties, while equities will pick up regardless of how economic data look. Good data will be a positive, and even bad data could be a net boon because it'll further increase chances that the Fed takes action.
"Equities are looking for the Fed to step up," Green said. "Bond buys are pricing in a system that looks to be broken."
By Tania Chen Of DOW JONES NEWSWIRES
No comments:
Post a Comment