Behind the Money

Fixed Income Irony: Bond Strategists Like Stocks More


In an ironic twist, bond strategists may be more bullish on stocks right now than the very people whose job it is to analyze the equity market.

“The continuation of investors' love affair with fixed income in 2010 makes little sense in light of rising interest rates,” wrote Jeffrey Rosenberg, Bank of America Securities Credit Strategist, in a note to clients this week. “With expectations for rising interest rates, more funds seeking equity-like returns may find their way back to equities, leaving a less robust liquidity environment for debt but leading to liquidity fueled price increases for equity.”

“I'll go with the stock market,” said Bill Gross, co-manager of the world’s largest fixed income fund at Pimco, in an interview last week. The so-called king of bonds cited the economic recovery.

While bond guys throw in the towel on their own market in favor of equities, the S&P 500 is already close to reaching the 2010 target projected by stock strategists at the start of the year. Equity analysts at all the major commercial banks, including Goldman Sachs and JPMorgan, gave an average year-end forecast for the S&P 500 of 1220, according to a consensus compiled by Birinyi Associates at the time.

After a five percent gain already this year, the S&P 500 closed four percent away from that target yesterday. It climbed as high as 1180 last week. The index fell today after a private employment report showed a decrease in hiring last month, hinting that maybe the economic recovery isn’t as robust as bond investors believe. Treasuries rose.

While in the past bond strategists have been correct in their belief that higher rates lead to higher equities, that may be different this time, some equity observers said. Typically, higher rates (and subsequently lower bond prices) are coincident with equity-friendly features such as a strong economic recovery and moderate inflation.

“Higher rates are kryptonite to a highly overleveraged economy such as ours this time so I don't get the positive outlook on stocks if yields are moving up,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. “Hard assets are the only thing I want to own in that scenario, in addition to Asian stocks whose economies will be more immune to a rise in rates because of lower debt levels.”

A survey released today of equity financial newsletter writers showed that a third of them believe we are due for a correction right now. The number of advisors who expect a 10 percent drop in the S&P 500 climbed to 33 percent, up from 30 percent last week, according to research firm Investors Intelligence.

As Stephen Stills once famously said, maybe bond strategists should learn to “love the one you’re with.”

With reporting by Jeff Cox

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