Let’s Tell A Risk Parity Ghost Story
The equity rally is the greatest-of-all-time, the V-shaped macro recovery is the greatest-of-all-time, [and] the bond bear market [is] now one of greatest-of-all-time," BofA's Michael Hartnett wrote, in the latest edition of the bank's popular weekly "Flow Show" series.
For many market watchers, the bond "bear market" (and some would quibble with that characterization) is on the verge of becoming acute enough to dent the equity rally.
Thursday's dramatic selloff in rates undercut stocks, leadi
Yesterday was not “fun”- but it did provide one of those days where you can re-confirm whether or not you believe in your investment portfolio.
Carry on.
Story is on point. RIght now it is perilous to run balanced portfolios these days. UST bonds at least are not a reliable hedge- and the causality is flowing from bonds to stocks. A curve steepener kills the hedge value of intermediate to long ust bonds. A reasonable approach is to figure out ways to lower your volatility absent UST bonds- think gold stocks, and possibly spread bond product- you are taking credit risk this way but it might mitigate some equity risk. At least you spread your bets a little bit better. It is not easy these days… I do this for my living- trust me on that one.
You might ponder floaters and TIPs. But if higher rates choke off the economy, who knows?
At what level do bonds, 7s and 10s, once again become an effective hedge for equity exposure? This afternoon, Zervos on CNBC mentioned 2%. I’m thinking that might be a little low — more like 2.50. Maybe the more important question is, how fast do we get there? I’m optimistic about the vaccine rollout and the reopening of the economy this summer and think we could see a 2 handle on 10s by Memorial Day. Thoughts?
Bonds selling off on growth and inflation expectations accelerating shouldn’t be a surprise. The fact that stocks might be collateral damage amid “good news” (especially high multiple growth names) is more a poor reflection of stocks (particularly the SPX and NDX) than USTs.
Given yield curves are quite steep now, if the risk to equities is instead a growth scare (reflation failing) or corporate earnings rolling over, government bonds may still provide decent a offset, depending on the duration.
This is a great topic. In 1994, I shorted bonds and shorted extra stock against my hedged convetible postions. Bonds sold of steadily till may. Bust the stocks I was short only went down 5%. The premium on the stuff I was long collapsed. So, the key was we had the rest of the year to recover my 10% drawdown and make a good return. I think whatever happens in 2022, real growth will give up a full percentage point for the next 20 years. I think there is a large long 5yr short 30yr trade out there, and perhaps it will be replace by long 2 short 5.
West Coast Stoic, given the relative performance of the 2’s, 5’s and 30’s over the two-day Thursday/Friday timeframe, it seems like the 5s30s unwind into a 2s5s steepener may have already occurred.