In 2019, escalating trade risks prompted investors to pile into bonds while simultaneously watching risk assets explode to the upside thanks to expectations of an aggressive monetary policy response to proliferating global growth risks.
In 2020, the coronavirus epidemic has created a similar dynamic.
Bonds are bid, that’s for sure. In fact, bond funds enjoyed a record weekly inflow through February 12, raking in a ridiculous $23.6 billion.
Any ideas about a “Great Rotation” back into equity funds and out of fixed income haven’t panned out thus far in 2020.
Through Friday, bond funds had seen $116 billion in inflows, versus just $59 billion for equity funds, according to data compiled by JPMorgan.
And yet, stocks are at record highs, underscoring the dynamic outlined above. It’s right back to 2019, where risk assets are seemingly bid on promises of stimulus and bonds are bid due in no small part to the economic backdrop which makes the stimulus necessary in the first place.
Or at least that’s one simplistic narrative to explain a situation that finds risk assets and bonds simultaneously buoyant.
One great encapsulation of this is 10-year Greek yields below 1%.
As Bloomberg correctly noted last week, “Greek bonds are still treated as a risk-on asset, much like equities, that rally when times are good and tend to sell off rapidly if sentiment turns”.
Right now, they’re getting the full benefit of the dynamic outlined above – they’re a fixed income instrument that doesn’t guarantee a loss to buy-and-hold managers (i.e., they still yield above zero) and they’re a risk asset too.
This is probably a good time to trot out one of the most nauseatingly clichéd quips in the history of market jokes: “What could go wrong?”
Well, one answer to that rhetorical question is that the dollar could remain stubborn, refusing to roll over, even in the face of rate cuts and liquidity injections from the Fed.
So, that’s something to think about.