The Economic Reopening Trade Is Changing Everything in Markets
(Bloomberg) -- Plenty on Wall Street expected bets on a post-pandemic world to change markets in 2021. But few could have predicted the ferocity of this reopening trade sweeping across assets.
From stocks to bonds and commodities, traders are moving in sync on the belief that the most ambitious vaccination campaign in history is about to supercharge economic growth and unleash price pressures that have long been dormant.
A gauge of U.S. inflation expectations, known as 10-year breakevens, is at 2.2% and hovering close to levels that haven’t been seen since 2014. Metals prices are roaring, while tech stocks that boomed when cities were under lockdown are suffering. But it is the ever-deepening selloff in global bonds that is mesmerizing Wall Street and beyond, with potentially dangerous consequences for risk assets.
“This is now a tantrum,” said Mike Riddell, who manages $9.5 billion at Allianz Global Investors in London, in a reference to the market selloff of 2013, when yields surged because traders thought the Federal Reserve would dial back stimulus.
“The lesson of a rates tantrum is that it becomes a problem for not just bonds, but for every asset class,” he said.
Here’s a look at how markets are being affected:
Bond Market Pain
Bonds are renowned for being some of the safest assets that money can buy, but they have one key weakness: inflation. As bets mount for faster price increases, debt markets have been roiled.
In the U.S., 10-year yields have surged almost 40 basis points this month, the most in four years. The yield curve, one of the purest metrics to see how inflation is being priced into markets, is the steepest since 2015.
It’s a theme that’s playing out globally. In Australia, 10-year yields are the highest in a year, even as the central bank steps up debt purchases.
There may be more turmoil to come. Implied volatility gauges both sides of the Atlantic have picked up to multi-month highs and policymakers are struggling to jawbone yields lower.
Duration, a measure of how vulnerable bonds are to a pick up in interest rates, is also proving to be a toxic mix. The world’s pile of negative-yielding debt -- highly vulnerable to duration risk -- has tumbled more than $4 trillion this year.
Corporate Credit Losses
Rising yields are taking a toll on the safest of corporate bonds. In Europe, the total return for an index of euro investment-grade bonds is negative 0.6% this year, the worst start to a year in data going back to 1999.
“Investors are scared,” said Andrea Seminara, chief executive officer of Redhedge Asset Management LLP. “In theory, it makes sense to buy those bonds trading at positive yields again but practically, portfolio managers will wait until there is stability.”
Value Triumphs Over Growth
In equities, value is mounting a comeback as investors shift cash to cyclical corners of the market where valuations are lower. Among S&P 500 stocks, value is set for its best month versus growth since the dot-com era in 2000.
Raw material prices are booming on the bet that the pandemic’s end will fire up growth engines. Copper is getting close to a record set a decade ago, oil has jumped to the highest in more than a year and agriculture prices are on the rise.
©2021 Bloomberg L.P.