Bond Yields Jump May Herald End of 'Risk-Off'
With stubbornly low U.S. bond yields now on the rise as stocks rally, market players are wondering if the end is nigh for risk-averse trades.
From the trading floors in Chicago and New York, debate among professional traders is now revolving around whether signs of an improved U.S. economy have prompted investors to buy higher-yielding, "riskier" stocks.
They may have good reason to do so: on Monday, the yield on the Treasury 10-year note rose to 2 percent, the first time since April 2012. The traditional inverse relationship between rising stocks and U.S. Treasury bond prices could suggest investors are buying into the scenario of an economic recovery.
Over the past few years, the global economic turmoil and high volatility in the stock market led investors to a "flight to safety" in the bond market, Anthony Grisanti, founder and president of GRZ Energy, said.
Now, a long promised shift into equities and other risk-sensitive assets might finally be at hand.
"I think investors are not looking for safety anymore," Grisanti said, pronouncing the bond rally "over". Investors are "looking for a little risk and they're putting it into equities."
In spite of doubts over Washington's ability to balance its books, bonds are generally considered less risky that stocks for several reasons. Normally, government debt is held for longer periods of time, and aren't as volatile as other financial instruments that get determined by world events or corporate earnings.
With the stock market on a tear, it makes it hard for investors to justify the meatier returns equities might offer. On Friday, all three major averages turned in their fourth-consecutive weekly gain. The S&P 500 index ended above the 1,500 level to boast its longest winning streak since November 2004.
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Stocks have pushed higher on strong earnings results, as well as improved economic data. Last week, jobless claims fell 37,000 to a seasonally adjusted 335,000, hitting a five-year low. Meanwhile, housing starts jumped 12.1 percent to its fastest pace since June 2008.
"Economies are improving not only here, but around the world. So you won't get the investors around the world buying bonds the way it is," said Grisanti.
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Pro trader Jim Iuorio, on the other hand, sees things differently. Given the improved economic data, Iuorio said it's "natural" for some investors to leave bonds for stocks. The 20-year market veteran added that investors typically rotate out of bonds and into stocks during the first few months of the year.
The rotation out of bonds and into stocks, Iuorio said, is "normal" but by no means a "great migration."