Risk Binge or a Bubble? Signals From Real Yields Split Investors

(Bloomberg) -- Another week, another record low for bond yields. That’s spurring a splurge on risk by investors and also fresh warnings they’ll live to regret it. 

With inflation-adjusted yields known as real rates plumbing new depths, growing confidence central banks will keep in place pandemic-era backstops is fanning a run-up in crypto to credit. And that’s all as the S&P 500 is hitting record highs. 

The question of whether to keep buying is dividing markets. Strategists at BlackRock and JPMorgan Chase & Co. are telling clients to seize on rising valuations. 

Meanwhile, buysiders at Amundi and Morgan Stanley Wealth Management are concerned that markets are getting carried away and fueling bubbles. Investors “don’t seem to care” that financial conditions are set to tighten by the middle of next year, Lisa Shalett, CIO of Morgan Stanley Wealth Management told Bloomberg TV on Tuesday.

Vivek Paul, portfolio strategist at BlackRock Investment Institute, is staying risk-on both tactically and because he isn’t expecting any policy shocks:

Once rates do start to rise, the pace of that path is going to be slower than we’ve been accustomed to and that is the thing that actually means that equity markets still have room to be supported in this environment. We continue to be risk-on in a tactical sense. 

Marko Kolanovic, co-head of global research at JPMorgan, sees scope for equities and credit to outperform:

The market implications of a central bank backtracking on liftoff are bullish for risk assets such as equities and credit, and should favor curve steepening in rates and a refocus of short duration positions from nominal to real yields.

Anne Beaudu, fixed income portfolio manager at Amundi, sees real rates set to rise:

The equity market is going up, up, up. So there are very accommodative financial conditions, which is good for growth prospects, but it could also create bubble risk and dislocation risks in the market

I think there is some dislocation and something to correct here. If the market believes that central banks will raise rates then at some point it should calm down inflation expectations, and push real rates up. 

Julien Lafargue, strategist at Barclays Private Bank, has faith central banks will keep the taps of stimulus open for months:

We maintain a pro-risk positioning simply because we believe real rates are going to remain negative and therefore the overall monetary policy is going to be accommodative for months to come. 

Lisa Shalett, CIO at Morgan Stanley Wealth: 

Soaring volatility in interest rates thus far has been shrugged off by equity investors, who are supported by some of the most negative real rates ever. At some point it is not just the direction of rates that matter but their level. 

Surprisingly weak low-end consumer confidence, a recent downturn in CFO optimism, a quickly normalizing savings rate and anxious mood in the political arena suggest that all is not Goldilocks. We believe risks of a market bubble are growing, mitigating forward returns.

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