The Treasury Shift
If Mr. Miyagi from the 1980s classic The Karate Kid had to describe the current investment landscape, he’d probably say something prolific along the lines of: risk on, risk off.
Those four words have resonated throughout the market between institutional investors as money managers and traders debate the best way to allocate funds and generate returns. The allocation to equities has been obvious as the market climbs higher, pushing major indices to highs not seen since before the financial crisis.
But in the fixed-income space, capital has made an interesting shift. Money is coming out of Treasurys and going into corporate bonds. Since the beginning of March, June futures on the 30-year T-Bond have fallen from 138.18 to 137. Short-term risk represented in the 2-year T-Note is similar with the futures falling from 110.005 to 109.300 in the same time period. The flight from U.S. government debt signifies a willingness to take risk during the time period that the Federal Reserve has outlined as a “low rate environment.”
“The bond market has slowly been liquidating all year, with failed attempts at breaking out and sideways action that was finally broken after the March future rolled into the June future,” Stewart Solaka, founder of Chicagostock Trading, told Markets Media. “Market making it hard for sellers to short however with the strong trend, the future rollover was needed to break the bulls back.”
Jeff Kilburg from Treasury Curve noted that with yields on Treasurys continuously heading higher, it appears that the asset allocation shift could soon mark a permanent change in the way people invest. “Despite the recent move up in Treasuries yields, I am not seeing the mass exodus as anticipated as well represented by others. This is a mere reaction to improved economic data as of late that diminishes the need for potentially further QE,” Kilburg told Markets Media.
The asset class is said to be gearing up to become the worst long term investment vehicle for years to come according to many Chicago-based futures traders, including Kevin Ferry, chief market strategist at Cronus Futures Management.
“In a repo-based system over an interbank money system, a very high demand for ‘risk free’ assets as collateral emerges,” Ferry told Markets Media. “This morphed into a pedestrian view that bonds and stocks were opposite sides of risk on-off teeter totter. Outside of a crisis, bonds lead stocks in positive correlation. The lag is longer than the attention span.”
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