Bonds Now Most Attractive Relative To Stocks Since 2011 – I Guess.

Are you looking for a good reason to rotate out of stocks?

Apparently not, because equities are sharply higher despite Donald Trump firing an elephant gun at the Chinese dragon on Monday evening.

But on the off chance you’re the type of person who thinks “all-out global trade war” might eventually be a risk-off signal for U.S. risk assets despite the best efforts of corporate management teams to keep their shares inflated by plowing a trillion dollars into buybacks, it’s worth noting that 10Y yields pushed through 3% again on Tuesday:

(Bloomberg)

That’s the “juiciest” since late May.

(Bloomberg)

And it steepened the 2s10s pretty sharply:

(Bloomberg)

As Bloomberg’s Andrew Cinko notes, “the yield spread of bonds over the S&P’s dividend yield is the biggest since July of 2011” at more than 123bps.

(Bloomberg)

Is that enough to prompt a rotation into bonds? Probably not, but hell, you never know. “Certainly someone has to find 10-year yields above 3% enticing”, Cinko goes on to write.

More importantly, this is just another manifestation of rising yields potentially siphoning demand from risk assets. Remember, USD “cash” is now a pseudo-viable asset (assuming you don’t care that your real yields there are still negative):

(Bloomberg)

But perhaps not for long. Because as Goldman wrote earlier this week, real rates on USD cash equivalents are diverging markedly from Europe and even from EM. If things keep going the way they’re going, that divergence is going to be stark indeed with two years:

(Goldman)

Amusingly, the higher rates go on shorter-dated USD fixed income, the less demand there’s likely to be for longer-dated bonds in a risk-off scenario, because who wants to take duration risk when you can get something similar in terms of yield on cash?