Is the bond rally finally over? The biggest failed trade of 2012 (short Treasurys) may finally be showing some traction in 2013.
Ten-year Treasury note yields are at the highest levels since April last year and seem poised to break through 2 percent; volume has increased in bond exchange-traded funds of all sorts since the start of the year.
Why is the bond market moving? It's not because of fear of imminent, dramatic inflation. As Greg Valliere at Potomac Research Group remarked this morning: "Our take is that rates are climbing because the threat of a recession just got far less likely in the wake of the 'fiscal cliff' deal."
I agree. But don't go too far: We are a long way from a notable lift-off. There is still tremendous slack in the economy. Today's jobs report, while improving, is nowhere near sufficient to support any kind of aggressive growth in the economy.
Regardless: The Street is starting to jump on the equities bandwagon.
Example: Today RBC Capital raised equity exposure with a risk-on bent:
1) upgrading materials, industrials to "overweight" on a stabilizing Europe, modest improvement in Asia, stronger domestic data, and a weaker dollar;
2) upgrading financials to "overweight" (even after a stronger 2012) on improving global economic backdrop and recovery in loan demand; and
3) downgrading consumer staples and health-care to "underweight," saying they "lack the economic leverage and market sensitivity to keep up with the benchmark in a broad-based rally."
Good ideas. The problem is: The smart money is already there.
1) In the U.S., the Russell 2000 and S&P Midcap Index hit HISTORIC HIGHS this week; the S&P 500 is near a five-year high;
2) in Europe: the U.K. and Greece are at 52-week highs, and Germany is near a five-year high; and
3) in Asia: Japan at a 22-month high, China (Shanghai Composite Index) at a 6.5-month high.
Please note: I said the smart money. Retail investors ... well, the jury is still out. Lipper is reporting that for the week ending Jan. 2, stock mutual funds had OUTFLOWS of $3.5 billion, while taxable bond mutual funds had INFLOWS of $82 million.
Stock ETFs, however, had INFLOWS, continuing a trend that has gone on for most of last year.
Bottom line on fund flows: If you include ETFs and mutual funds together, there is a trend that began in December: modest stock INFLOWS, continuing INFLOWS into bond funds, but that is diminishing rapidly.