A $16 Billion Boost to Stocks May Be Coming From Bond Market

(Bloomberg) -- If U.S. stocks finish this gut-wrenching month on a high note, investors may want to thank pension funds for playing a part.

Institutions are busy redeploying some $16 billion into equities from bonds as part of a “fairly sizeable” month-end portfolio rebalancing, according to Pravit Chintawongvanich at Wells Fargo & Co. The flows could be enough to fuel a short-term stock surge through the waning days of August, says Macro Risk Advisors.

The spark behind this month’s bigger-than-usual rotation? The rally in fixed income which trounced equities on a scale seen just a few times since 2015, according to MRA. Bonds outperformed the asset class by 5.5% in the month through August 26, the firm’s data show, forcing pension funds to buy more stocks to preserve their allocations.

While U.S. stocks this week are being buffeted by trade hopes, flows from fundamental and systematic money managers can also help move the market. “We expect equities to outperform bonds in the very short-term” as a result of the pension-fund rebalancing, MRA strategist Max Grinacoff wrote in a note.

The S&P 500 Index jumped 1.3% as of 12:11 p.m. in New York, while the yield on 10-year U.S. Treasuries rose four basis points.

Over the final four days of any month since 1996 in which bonds outperformed equities by more than 5%, Grinacoff found that stocks returned 2.4% on average.

Wells Fargo’s fixed income strategists had earlier pegged the amount of rebalancing at around $11 billion as of Aug. 22. Chintawongvanich estimates the amount has increased since then thanks to bonds rallying further.

--With assistance from Luke Kawa.

To contact the reporter on this story: Yakob Peterseil in London at ypeterseil@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Sid Verma

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