Trader Talk

Is The Bond Rally Over?

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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.

The U.S. dollar index is up 1.4 percent since the start of the year; the yen is at a 2.5-year low against the dollar. Gold is at a 4.5-month low.

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.