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High-Yield Bond Rally Signals Bullish Outlook for Stocks

  • Risky high-yield bonds outperforming corporate bonds is a bullish signal for stocks.

  • This is the second longest stretch of outperformance for high-yield bonds.

  • The outperformance suggests bond investors are comfortable taking more risk.

  • It coincides with declining spreads on high-yield bonds.

  • Constructive credit markets support bullish seasonality scenarios for stocks.

businessinsider.com
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Surging U.S. Treasury yields are causing concern among investors as they wonder how much it will impact the rally in stocks and speculative assets, with the S&P 500, technology sector, bitcoin, and high-growth names all experiencing losses; rising rates are making it more difficult for borrowers and increasing the appeal of risk-free Treasury yields.
Stocks are facing a "real" yield problem as investors become more focused on rising real yields, which could result in lower stock prices and a hit to the P/E multiple.
Investors are turning to high-yield cash alternatives, such as savings accounts and bonds, which offer returns of over 5% and are outperforming the S&P 500, prompting some to reconsider their exposure to the stock market's volatility.
Stock investors are optimistic and focused on the potential positives, while bond investors are more concerned about potential negatives; however, when the stock and bond markets differ, the bond market is typically more accurate in predicting the state of the economy according to Interactive Brokers Chief Strategist Steve Sosnick.
Investors should consider moving into longer-dated bonds as historical data shows that the broader U.S. bond market typically outperforms short-term Treasurys at the end of Federal Reserve rate hiking cycles, according to Saira Malik, chief investment officer at Nuveen.
Despite the appearance of a "Goldilocks" economy, with falling inflation and strong economic growth, rising yields on American government bonds are posing a threat to financial stability, particularly in the commercial property market, where owners may face financial distress due to a combination of rising interest rates and remote work practices. This situation could also impact other sectors and lenders exposed to commercial real estate.
A surge in bond issuance by U.S. investment-grade-rated companies is putting pressure on long-end U.S. Treasuries as investors opt for higher-yielding corporate debt over government bonds.
Major companies are becoming more cautious about borrowing in a higher interest rate environment, leading to a decrease in corporate bond issuances.
Bank of America has identified five risks to the stock market but remains optimistic and finds attractive opportunities in stocks compared to bonds.
Treasury yields are expected to rise in the future, which could have a negative impact on the stock market.
Bond investors are faced with the decision of how much risk to take with Treasury yields at their highest levels in more than a decade and the Federal Reserve signaling a pause in rate hikes.
US bond markets have been experiencing a rare and powerful trend known as bear steepening, which involves a significant increase in long-term yields, and if left unchecked, it could have detrimental effects on equity markets and the overall economy.
Yields in the bond market are rising due to several factors including higher inflation premium, hawkish Fed policy, rising energy prices, and increased Treasury debt issuance.
The recent surge in bond yields, with 10-year Treasury yields hitting levels not seen in over 15 years, is impacting the stock market as investors shift their focus to safer bond investments, which offer higher yields and less volatility than stocks.
Investors attempt a risk-on rally as Treasury yields and oil prices stabilize, but concerns over higher interest rates continue to impact sentiment in European and global markets.
Junk bonds have performed well for bond investors in 2023, but their current trading patterns may be cause for concern.
The surging bond yields are causing concern among investors that the highly valued shares of giant technology and growth companies, including Apple, Microsoft, Amazon, and Tesla, may be vulnerable to a decline.
U.S. stocks and bonds are falling due to another surge in Treasury yields, leading to anxiety among investors who fear that the Fed will hold interest rates higher for longer if the labor market remains strong.
Stocks are essentially long-term bonds with a variable coupon, and the bond nature of stocks will result in the S&P 500 returning to last year's lows following new lows in the price of long-term bonds.
The bond market is causing concern for investors, particularly due to the actions of bond vigilantes who have increased control over the Treasury market and are pushing up yields. This has raised worries about the escalating federal budget deficit and its impact on bond demand and market clearing. The vigilantes have also left the high-yield corporate debt market untouched, leading to speculation about their views on government securities.
The stock market's resilience in the face of rising bond yields could be a warning sign, as it mirrors the conditions seen before the 1987 stock crash and any sign of recession now could lead to a major sell-off, according to Societe Generale strategist Albert Edwards.
The article discusses the recent rise in Treasury yields and explores the positive aspects of higher bond yields.
The slump in US Treasuries has caused a sell-off in emerging-market debt, resulting in the yield on bonds exceeding the earnings yield on stocks, a rare anomaly that historically signifies increased risk.
The recent surge in global bond yields, driven by rising term premiums and expectations of higher interest rates, signals the potential end of the era of low interest rates and poses risks for heavily indebted countries like Italy, as well as Japan and other economies tied to rock-bottom interest rates.
The recent surge in bond yields is causing a significant shift in markets, but there is still optimism among investors.
Surging Treasury yields are weighing on stocks and financial markets, and the only way to relieve the pain for bond investors may be a decline in stocks.
Market observers are concerned about a sharp jump in Treasury yields similar to that of the 1987 crash, and Saxo Bank's chief investment officer Steen Jakobsen suggests that investors reduce risk by increasing cash balances, hedging portfolios, rotating into short-term bonds, favoring defensive sectors over cyclicals, and avoiding mega-cap stocks.
The rise in Treasury bond yields above 5% could lead to a more sustainable increase and potential havoc in financial markets, as investors demand greater compensation for risk and corporate credit spreads widen, making government debt a more attractive option and leaving the stock market vulnerable to declines; despite this, stock investors appeared unfazed by the September jobs report and all three major stock indexes were higher by the end of trading.
The surge in Treasury yields has negatively impacted stocks with bond-like qualities, particularly in sectors such as utilities and consumer staples, leading to significant losses for bond proxies.
Long-term bond yields have surged as the Federal Reserve reduces its bond portfolio and the U.S. Treasury sells debt, contrary to the expectations of Wall Street and investors worldwide, but a research paper written by a University of Michigan student six years ago accurately predicted this scenario.
The Treasury bond market sell-off has led to a significant crash, causing high yields that are impacting stocks, commodities, cryptocurrencies, housing, and foreign currencies.
The bond market has experienced its worst annualized returns in 20 years, leaving investors with significant losses and challenging traditional views of bond investments as safe and fixed income.
Despite disappointing performance in 2023, bond market experts believe that fixed income investments, particularly bonds, have a positive outlook due to the expectation that the Federal Reserve will soon stop raising interest rates. The rise in bond yields presents a buying opportunity, with reasonable valuations and high yields offering potential returns. However, the threat of elevated interest rates remains, impacting the value of fixed income investments. The experts advise diversifying within the fixed income asset class, considering options such as Treasuries, municipal bonds, and high-yield bonds, while being cautious about credit quality and duration.
The 60/40 portfolio, which allocates 60% to stocks and 40% to bonds, has experienced significant losses and drawdowns recently, heightening the risk of a lost decade, according to analysts at Goldman Sachs.
As bond prices have plummeted in the past few years, making high-quality bonds more appealing, now is a good time to invest in investment-grade bonds through low-cost mutual funds or exchange-traded funds, as bonds still provide reliable income and diversification in investment portfolios.
A rise in bond yields and volatility, coupled with weak market breadth, suggests a potential market sell-off, as highlighted by the author's analysis.
If bond yields surpass 5% for a prolonged period, stocks may face trouble, according to Bank of America strategist Michael Hartnett, who believes this level is a critical threshold for the market, although other factors such as economic data, inflation, geopolitical tensions, and the availability of small business loans may also impact stock performance.
The recent rally in stocks, driven by the belief that elevated bond yields are enough to tighten financial conditions and eliminate the need for further central bank action, is seen as a dangerous view that ignores the threat of higher Treasury yields on stock valuations and competition for risk capital.
UBS advises investors to focus on bonds rather than stocks, predicting that the 10-year US Treasury yield will drop to 3.5% by mid-2024 due to slowing growth and the Federal Reserve's easing of policy, offering bondholders returns of around 13%.
The ongoing bond market selloff is causing the worst Treasury bear market in history, but investors are not panicking due to the orderly nature of the decline and the presence of institutional investors and shorter-term bonds as alternative options.
The US Treasury bond market is at risk of losing its strategic and short-term anchors, raising uncertainty about its future destination and the absorption of additional US debt, according to economist Mohamed El-Erian.
Bond yields have surged as investors realize they are a poor hedge against inflation, while stocks are a much better option, according to Wharton professor Jeremy Siegel.
The co-chief investment officers of Bridgewater Associates predict an ongoing upward adjustment in bond yields, citing various economic factors and the need for a risk premium in bonds, which could lead to increased pressure on growth and lower prices in the equity market.
The bond market is influenced by a lot of noise in the short run, but long-term investors can find opportunities by separating the noise from the true yield signal, which is driven by inflation.
The relentless selling of U.S. government bonds has caused Treasury yields to reach their highest level in over 15 years, impacting stocks, real estate, and the global financial system as a whole.